Fallout From Collapse of S&L; Shadows Clinton : Inquiry: Two targets of criminal probes charge that the then-governor had a role in the debacle. The White House strongly disputes the allegations.

TIMES STAFF WRITERS

The 1989 failure of a small Arkansas savings and loan has triggered criminal probes targeting some of President Clinton's oldest friends and political allies, compelling the President repeatedly to deny allegations that he had a role in the debacle.

One of those longtime Clinton associates is James B. McDougal, former owner of the ill-fated Madison Guaranty Savings & Loan, who told The Times that he hired the then-governor's wife, attorney Hillary Rodham Clinton, in 1984 because Clinton said his family needed financial help.

David Hale, another longtime political supporter and former Clinton-appointed judge who is currently under federal indictment for loan fraud, said he made a $300,000 loan to McDougal's wife in 1986 after Clinton personally asked him to help.

That loan, backed by the Small Business Administration that subsidized Hale's investment company, was never repaid.

McDougal has acknowledged that $110,000 of that SBA-backed loan was invested in an Ozarks real estate venture in which the Clintons were half-owners.

Both claims--that the governor lobbied the ailing thrift to hire his wife and that he urged Hale to loan money that went into a Clinton-owned business--have been strongly disputed by the White House. Clinton told reporters last week that he and his wife had done nothing improper.

But such allegations, raising questions about possible conflicts of interest and abuse of office by the then-governor of Arkansas, continue to be nettlesome because they are coming not from Clinton's critics but from some of his oldest friends and supporters.

Take, for example, the story behind Hillary Clinton's legal retainer.

The matter first became an issue during last year's presidential campaign when it was disclosed that Hillary Clinton had represented the savings and loan in an appeal for favorable action by the state securities commissioner, an appointee of her husband, the governor.

What had not been previously reported was McDougal's explanation for hiring the governor's wife. He provided this account in a recent interview with The Times:

Early one morning about nine years ago, McDougal answered a knock at his office door from a winded and sweating Clinton, out on one of his morning jogs. Clinton was then struggling to retire campaign debts and to make ends meet on his $35,000-a-year salary. The governor expressed concern about his family's financial condition and told McDougal that "things were tight," requesting that the savings and loan send some business to Hillary Clinton through her law firm.

"I asked him how much he needed, and Clinton said 'about $2,000 a month' " McDougal said. Later that day, the Madison Guaranty owner said, he directed an S&L; executive to immediately put Hillary Clinton's Rose Law Firm on retainer for that amount.

"I hired Hillary because Bill came in whimpering they needed help," McDougal told The Times. He said he had no specific legal work in mind when he hired Hillary Clinton.

McDougal said he recalled the event vividly because he was so uncomfortable in the meeting--not over the retainer issue, but because throughout that morning conference, Clinton sat sweating in McDougal's new leather desk chair, an expensive gift from his wife.

There is no dispute that Hillary Clinton subsequently went on retainer for Madison Guaranty at $2,000 a month. But White House Press Secretary Dee Dee Myers said Clinton never sought business for his wife.

"The President had nothing to do with it," Myers said. "He never solicited business for the Rose Law Firm or his wife. This never happened."

McDougal, who was acquitted in 1990 of loan fraud charges stemming from his S&L;'s collapse, acknowledged that he is the subject of a renewed criminal investigation into other aspects of the thrift's failure.

But White House efforts to discredit McDougal pose something of a dilemma since he was once a close friend and business partner of Clinton. It was their business arrangement that first brought Clinton some political embarrassment.

Early in the 1992 presidential campaign, the New York Times disclosed their partnership in a speculative land venture called Whitewater Development. The Clintons and McDougals shared 50-50 interest in the Ozarks project from 1978 until the very eve of the presidential inauguration.

The Clintons reportedly lost money in the deal. However, the press account questioned whether the governor should have been in any kind of business relationship with the owner of a state-regulated savings and loan.

Compounding concerns about such potential conflicts of interest was the disclosure that Hillary Clinton, while on retainer to Madison Guaranty, had represented the S&L; in its appeal to the state securities commissioner.

Last week, the Washington Post reported that federal investigators are trying to determine whether McDougal may have improperly used Madison Guaranty funds to help Clinton retire his 1984 campaign debt.

In April, 1985, the S&L; hosted a fund-raiser at its Main Street office to raise $35,000 for Clinton. Investigators suspect that $12,000 of that money may have come from overdrafts at the faltering financial institution. At the time, McDougal was trying to get state approval to raise new capital for the savings and loan through various unconventional means.

That approval later was granted after an exchange of correspondence between the newly appointed state securities commissioner and the Rose Law Firm, one of which was addressed to "Dear Hillary."

Hillary Clinton has said she did only minimal work on the appeal and that there was no conflict of interest involved. Beverly Bassett Schaffer, the Clinton-appointed securities commissioner, said in an interview that Hillary Clinton's role did not influence her approval of the appeal.

Ultimately, the state-approved capitalization plans were not implemented, in part because Madison Guaranty's financial condition deteriorated too rapidly.

Meanwhile, during the same period that Madison Guaranty was helping Clinton raise campaign money and paying a legal retainer to the governor's wife, the state sent some business Madison Guaranty's way as well. A state of Arkansas revenue office rented a vacant building controlled by the S&L.; McDougal, according to published accounts, said Clinton had helped him get the contract.

By early 1986, however, the condition of Madison Guaranty was sufficiently perilous that McDougal and others were especially concerned about a pending federal examination of their books and records.

McDougal denied knowledge that his S&L; was in trouble, but a previous bank examination in 1984 had already cited Madison Guaranty's extensive real estate loans to entities controlled by McDougal and his associates.

Examiners warned that the "viability of the institution is jeopardized through (its) current investment and lending practices in real estate development projects."

Records show that McDougal had invested heavily in a number of real estate development deals, some of them with politically prominent people. Those loans and investments would result in another scathing bank examination report in 1986.

It was in anticipation of such criticism, Hale said, that McDougal asked him for help. It also is the origin of another disputed link between the failing S&L; and Clinton.

In a series of interviews, Hale provided this account:

It was around February, 1986, when he was called to a meeting with Clinton in one of McDougal's real estate development offices on the outskirts of Little Rock.

At the time, Hale operated a family investment firm called Capital-Management Services, which loaned out venture capital to minority and disadvantaged borrowers and which was subsidized by the SBA. According to Hale, McDougal had previously asked him to help clear up some potentially troublesome obligations involving "the political family" on the Madison Guaranty books. He said he came to learn that the family included Clinton, although he did not know details of the governor's involvement with McDougal or the S&L.;

On one occasion, when Hale happened to be waiting for a ride on the steps of the state Capitol as Clinton passed, he said the governor approached and asked if Hale was going to be able to "help Jim and me out."

Hale was a prominent Arkansas Democrat, and he and his family were longtime political supporters of Clinton. When the governor created the state's first municipal small claims court, he named Hale as its first judge. By early 1986, Hale was running the biggest court in the state.

"I knew I had to help. There never was any question," Hale said.

At the February meeting with Clinton and McDougal, Hale said discussions centered on how to structure a $150,000 loan using Hale's SBA-backed fund.

"Bill said they could use some raw land in the Ozarks as collateral, but that his name couldn't appear on any of the documents," Hale said, noting that he declined the offer of raw land as security since the SBA did not consider it reliable collateral.

They agreed, Hale said, to make the loan in the name of Susan McDougal, the Madison Guaranty owner's wife. Hale said that some days after the meeting with Clinton, McDougal asked Hale to raise the loan amount to $300,000. The increase was not discussed with Clinton, he said.

The White House said last week that Clinton had no recollection of any meeting with Hale about a loan. McDougal also said the meeting never occurred.

However, not in dispute is the fact that Hale did make a $300,000 loan to Susan McDougal, doing business as Master Marketing. What happened to most of the money remains a mystery.

According to McDougal and documents, $110,000 of that loan went toward a down payment on land for the Clinton-McDougal Whitewater Development project. McDougal said he made that investment without consulting the Clintons and the land was later lost to foreclosure.

The $300,000 loan to Susan McDougal, now divorced from the former thrift owner, also went into default, contributing to a financial crisis in Hale's SBA-backed fund that he contends led to his current legal problems. In July, he was indicted on three counts of loan fraud unrelated to the McDougal transaction and immediately resigned from the bench. He remains under investigation.

While it has been more than four years since Madison Guaranty failed, costing U.S. taxpayers about $47 million, criminal investigations arising from the failure continue. In recent weeks, sources say, federal regulators have asked U.S. Atty. Paula Casey, also a Clinton appointee, to investigate several other transactions at Madison Guaranty. As a result, McDougal--like Hale--remains under a cloud.

White House officials point to the criminal charges pending against Hale and the potential charges against McDougal as evidence that their stories about Clinton are not to be believed. Nonetheless, the Administration has been unable to quiet the controversy.

Last week, Sen. Lauch Faircloth (R-N.C.) asked Atty. Gen. Janet Reno to appoint an independent counsel to look into the finances of Whitewater Development. Reno declined, saying the Justice Department can handle any necessary inquiry.

On Thursday, Rep. John J. LaFalce (D-N.Y.), chairman of the House Small Business Committee, asked the SBA inspector general to investigate Hale's $300,000 loan to Susan McDougal, including the $110,000 diversion to the Ozark property development.

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