Defunct S&L;’s Connections to Arkansas’ Political Elite Prove Vexing for Clinton : Inquiry: Regulators find trail of shell companies, false transactions and questionable payments. The President has not been linked to wrongdoing.
When federal examiners entered the offices of a small savings and loan here in 1986, among the many troubling loans they discovered on the books was a series of transactions financing a 1,100-acre real estate development on the outskirts of town known as Castle Grande.
It was intended to be a low-cost residential and commercial development for families seeking an escape from the city. But in 1986 it was also an investment venture plagued by questionable agreements involving prominent Arkansas political figures.
Almost immediately the bank regulators found a trail of shell companies, fictitious transactions, inflated profit statements and questionable payments to insiders. Eventually Castle Grande would be included in a list of projects involving possible criminal conduct that federal regulators referred to prosecutors for further investigation.
But it was the political connections, not only in the Castle Grande project but also in others financed by the savings and loan, that finally led the Justice Department this week to take control of what had been treated previously as a routine local investigation. Two congressional inquiries also have begun.
For President Clinton, who has not been linked to any wrongdoing, the probes are nettlesome developments. The controversy centers on Madison Guaranty Savings & Loan, a defunct thrift run by a former Clinton aide and business partner. Madison Guaranty is depicted in interviews and internal regulatory documents obtained by The Times as a bank favored by the state’s political elite.
Jim Guy Tucker, who succeeded Bill Clinton as governor, received more than $1 million in loans from the institution at the same time that his law firm represented the thrift. He later negotiated a 50% reduction of his debt. That reduction is reportedly one of the subjects of investigation.
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Former Sen. J. William Fulbright, a patron of Arkansas Democrats, also had loans from the S&L.; The father-in-law of Associate Atty. Gen. Webster Hubbell, the third-ranking official of the Clinton Justice Department, invested in the Castle Grande project and defaulted on $587,793 in Madison Guaranty loans.
And the year before the team of federal examiners arrived, Madison had placed Hillary Rodham Clinton on a $2,000-a-month legal retainer and organized an employee fund-raiser to retire Gov. Bill Clinton’s 1984 campaign debt. At the time, the struggling S&L; was seeking approval from state authorities for a plan to generate new capital to stay afloat.
James B. McDougal, the owner of the failed thrift, denies any wrongdoing and blames the regulators for Madison’s failure. McDougal, a longtime Clinton friend and business partner, was tried and acquitted in 1990 on fraud charges in connection with other Madison loans.
Now bankrupt and living in a mobile home in rural Arkadelphia, Ark., McDougal acknowledged that he is a target of the new investigation.
Questions about Clinton’s ties to Madison Guaranty and McDougal first surfaced during the 1992 presidential campaign. But the controversy has gained new momentum in recent days with disclosures that savings and loan funds may have been improperly used to retire Clinton’s 1984 campaign debt. The Times also disclosed that McDougal said he hired Hillary Clinton as a lawyer at the urging of her husband.
President Clinton has said neither he nor his wife did anything improper in their dealings with McDougal or Madison. The White House has denied McDougal’s claim that Clinton personally sought the legal retainer for his wife.
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In many ways, Madison Guaranty was typical of the 1,100 other savings and loans that collapsed in the 1980s. Regulatory records show that the institution grew dramatically, invested heavily in risky real estate deals and paid large sums to its officers. McDougal and his wife drove Jaguars and shared a Bentley for a time.
McDougal had no background in the savings and loan business when he bought the S&L; in 1982, when it was a tiny thrift in rural Woodruff County. He called himself a “country road populist” who hated bankers.
But he had big aspirations. He renamed the institution Madison Guaranty, moved the headquarters to Little Rock and embarked on a string of real estate investments, including an island off the coast of New Brunswick, Canada.
The growth was geometric. Riding a wave of real estate loans, assets skyrocketed from $6 million in 1982 to $107.6 million in 1985. At the same time, Madison’s capital reserves--the cushion against losses--declined sharply.
“This institution should have been flashing bright red on the regulators’ screen at least by 1984,” said Bert Ely, a financial consultant who has examined Madison’s records.
McDougal had been trying since early 1985 to raise more capital. Among his plans: Issue preferred stock and start a broker-dealer subsidiary. Both were highly unusual for Arkansas thrifts and required approval by the state securities commissioner.
With Hillary Clinton acting as an attorney for Madison, in April, 1985, the S&L; appealed to the commissioner, who only weeks earlier had been appointed to the job by Gov. Clinton. Both requests were approved but never implemented because of the precipitous decline of the S&L.;
That same month McDougal held a fund-raiser to retire Gov. Clinton’s lingering $35,000 campaign debt left over from the previous fall. McDougal told his executives to contribute.
“Bill’s in trouble and we’re going to have to get together and help him out,” one former Madison official recalled McDougal telling him.
The ex-official was one of two former senior executives at Madison who told The Times that McDougal instructed them to contribute to the governor’s campaign fund. They agreed to be interviewed only if their names were not used.
Clinton did not show up for the cocktails and canapes served at Madison’s offices, but one of the the former S&L; officials recalled that the governor’s campaign manager made the rounds “collecting the checks.”
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In January, 1986, examiners from the Federal Home Loan Bank Board walked in the front door at Madison’s Main Street offices for the first time.
A thrift executive in the lobby when the examiners arrived recalled overhearing one examiner telling the others, “Look at that Bentley and those Jaguars in the parking lot. Somebody’s stealing. We’ll shut this thing down.”
McDougal said in an interview that he knew that the examiners were coming but expected a good report.
“I’d taken a savings and loan that was going under and turned it around,” McDougal said.
But a former executive said McDougal was concerned. A 1984 bank examiner report had warned that the “viability of the institution is jeopardized” by its questionable lending practices.
The owner of an outside investment firm said McDougal came to him, anxious to clear up some transactions involving prominent people before the examiners reviewed the S&L;’s books.
“McDougal said we need to clean up some problems with our friends in the political family,” said former Judge David Hale, owner of Capital-Management Investment. He controlled a venture capital investment fund subsidized by the Small Business Administration that was created to make loans to disadvantaged and minority borrowers.
Bill Clinton also urged him to help, Hale said.
Hale said he subsequently made a series of loans, totaling $700,000, to Tucker, to McDougal’s wife and to Stephen Smith, a former Clinton aide and political consultant.
Hale, who is now under federal indictment on loan fraud charges, said a $150,000 loan to McDougal’s wife was structured at an evening meeting at the Castle Grande sales office with McDougal and Clinton. Clinton at one point offered to provide collateral but did not want his name linked to the transaction, Hale said.
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Hale said he declined the collateral but did make a loan to Susan McDougal for $300,000. He said it was increased at McDougal’s request and without discussion with Clinton. That loan was not repaid, and what happened to most of the money is a mystery.
The White House said last week that Clinton had no recollection of any meeting with Hale about a loan. McDougal said the meeting described by Hale never occurred.
McDougal said $110,000 of the loan was used as down payment on land for Whitewater Development Co., a 50-50 partnership between the McDougals and the Clintons. That money was lost, and a lawyer for the Clintons says they never knew of the deal.
McDougal’s efforts to save the thrift finally collapsed under the weight of the findings of the examiners.
According to previously undisclosed examination reports, Madison had a portfolio of loans secured by property that was worth less than the loans. The examiners said profits had been inflated and hundreds of thousands of dollars paid in commissions and fees to McDougal’s wife and other relatives. The losses on three projects alone would make the institution insolvent.
One of those three projects was Castle Grande, where examiners said the land was “low and swampy and cannot be developed without considerable cost . . . . There is no evidence that there is a viable market for this land.”
Among the big borrowers on Castle Grande were Tucker, whose law firm represented Madison at the time, and Seth Ward, Hubbell’s father-in-law. According to the examination reports, each of the two men had borrowed in excess of $1 million to develop portions of the project.
Both defaulted on the payments.
Regulators forced McDougal out of Madison’s management later in 1986. Attempts by new management to resuscitate the thrift failed, and it was taken over by the government in 1989. Losses will cost taxpayers $47.6 million.
The Resolution Trust Corp., which oversees the nation’s thrift cleanup, referred several matters involving Madison to the U.S. attorney’s office in Little Rock in October, renewing the criminal investigation.
Earlier this month, Hubbell asked that he and his entire staff be excused from involvement in the investigation. His memo to Atty. Gen. Janet Reno did not specify a reason.
Hubbell and Hillary Clinton were senior partners at Little Rock’s Rose Law Firm, which was hired by the government in 1989 to try to recover some of the lost $47.6 million. Hubbell became the government’s lead lawyer.
Government conflict-of-interest rules generally prohibit lawyers from representing the government against a savings and loan for which they or their firms have done significant work.
Hubbell said through a spokesman that he told the regulators in 1989 that Mrs. Clinton had represented Madison Guaranty, but regulators reportedly have no record of any such disclosure by Hubbell or others at the law firm.
In addition, Hillary Clinton’s representation of Madison was not disclosed to thrift examiners in 1986, according to records. Bank regulators require such disclosure to identify key insiders at the institution.
Regulators say, however, that records show that Hubbell did disclose that his father-in-law was among those with loans in default at Madison.
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Earlier this week, the Justice Department announced that it was taking over the investigation of Madison Guaranty and Hale. U.S. Atty. Paula Casey of Little Rock--a Clinton appointee and political supporter--had agreed to withdraw from the matter to avoid any appearance of favoritism. Casey’s husband also holds a state job under Tucker.
The investigation is now headed by Donald B. Mackay, 55, a senior attorney in the fraud section at the Justice Department. Mackay is a longtime prosecutor who served as U.S. attorney in Springfield, Ill., under former Presidents Richard Nixon and Gerald R. Ford.
Justice Department sources said they expect Mackay and two assistants from Washington to spend several weeks re-examining a series of transactions at Madison Guaranty and Hale’s investment firm. In the meantime, a report is due next week to the House Small Business Committee on Hale’s transactions. The House Banking, Finance and Urban Affairs Committee already has opened a preliminary inquiry in response to a Republican request.
