Arkansan Says He Ordered Halt to Clinton Loans : Inquiry: Ex-banking commissioner was troubled by lending by McDougal’s institution to the state’s business and political leaders.

A former state banking commissioner says that in 1983 he ordered a small Arkansas bank run by James B. McDougal to stop making loans to then-Gov. Bill Clinton on the grounds that the loans were part of a troubling pattern of lending to high-powered members of Arkansas’ business and political leadership.

Marlin Jackson, the state banking commissioner and a Clinton appointee, said the loans to prominent out-of-towners could threaten the stability of the tiny bank in Kingston that had confined itself largely to its own community until taken over by McDougal, Clinton’s partner in the now-controversial Whitewater real estate development project.

Records indicate that Clinton’s borrowings from the Bank of Kingston helped finance his investment in Whitewater.

Records also suggest that McDougal’s response to Jackson’s order was to shift the bulk of financing for the Whitewater venture to his savings and loan, Madison Guaranty, which operated under far less stringent regulatory oversight than commercial banks did. Little Rock-based Madison is now the subject of a federal grand jury investigation.

The Clintons have defended their involvement with McDougal. They have said they were purely passive investors in the money-losing Whitewater project and had no knowledge of the questionable financial activities at the failed thrift or at Whitewater.

But Jackson’s statements and the records suggest that Clinton was warned early on of regulators’ concerns about financial practices at a McDougal lending institution.

Jackson said he spoke personally to the governor about the matter after he, joined by the Federal Deposit Insurance Corp. officials, issued the loan crackdown to the Bank of Kingston.

Contacted for comment, White House official Bruce Lindsey said the banking commissioner’s action would not have been a red flag to Clinton about McDougal’s financial practices. Making loans outside a bank’s local area was “not close to the edge” in terms of legal banking practice, he said.

Further, he said, breaking with McDougal and getting out of Whitewater in 1983 would have been more questionable than staying in. “In 1983, Whitewater was a losing venture. . . . To have disengaged or walked away would have constituted receiving favorable treatment from whomever bought them out or let them out. Once Whitewater became a losing venture, the Clintons believed they were stuck.”

The Clinton loans from the Kingston bank totaled at least $30,000, according to records, and were at or near the maximum amounts the bank was allowed to lend to any one individual, according to Jackson.

Jackson said he told Clinton that “you may be hearing from your friends,” and explained why he had moved to stop McDougal. Clinton told Jackson not to worry about political fallout from the issue.

Jackson did not specifically mention to Clinton that Clinton’s own loans were a concern in the matter. “I didn’t think I had to,” recalled Jackson.

Six years after the bank regulators’ warning at the Bank of Kingston, McDougal’s Madison Guaranty S&L; failed and was seized by the federal government, costing taxpayers $47.6 million. The Clintons maintained a share of Whitewater until 1992, when they sold their interest to McDougal. They have said they lost $69,000 on the investment.

The Justice Department is now investigating allegations that the thrift’s funds were siphoned off for private uses and investments. Republicans in the House and Senate also have called on Atty. Gen. Janet Reno to appoint a special prosecutor to handle the investigation. On Wednesday, the White House said that President Clinton’s attorney would begin turning over Clinton’s personal records related to Whitewater to federal investigators.

McDougal bought the bank in Kingston, a town of 200 people about 25 miles east of Fayetteville, Ark., in October, 1980, along with other Clinton confidants and members of Arkansas’ political elite, including Jim Guy Tucker, who is now the state’s governor.

Within days of the purchase, records show, he began using the bank to finance Whitewater Development, a venture he and the Clintons had established in 1978 to develop and sell resort property in the Ozark Mountains.

Records obtained from former McDougal business partners show that Whitewater had a checking account at the Bank of Kingston that was used by both the Clintons and McDougal.

In August, 1983, a bank examination by state regulators first raised questions about the loans to Whitewater and Clinton. Jackson and two officials from the Federal Deposit Insurance Corporation met with McDougal and the bank’s board of directors soon after the examination to express their concerns.

Jackson said he was concerned that the bank was being stretched beyond its reasonable scale by loans to important figures like Clinton, executives of major corporations like Wal-Mart and Tyson Foods, and other McDougal friends.

So Jackson, supported by the FDIC officials, told the bank board not to extend any more credit outside of the bank’s “natural trading area” in the region around Kingston.

“One of the local directors, a good old boy who was not part of McDougal’s management group, called out and asked me if that meant they couldn’t loan any more to Bill Clinton,” recalls Jackson. “He was testing me, because he knew I was appointed by Clinton. And so I said it did, that political leaders should be treated like everybody else.”

Jackson said that a formal order was then issued, directing that the out-of-town loans be called in for full repayment within 18 months. “We figured if we just told them without putting it in writing, they might forget,” Jackson said.

David Barr, a spokesman for the FDIC, said that the agency does not comment on confidential meetings between FDIC officials and banks. Bill Ford, the current Arkansas bank commissioner, also said that he could not comment on the matter.

Barr added, however, that such a written directive would be highly unusual. “I’ve complained to banks about out of town lending, but I never felt the need to issue a written directive about it,” he said.

Jackson said he stopped Clinton in the hallway of the state capitol to tell him that he had moved against McDougal’s bank. “I wanted him to understand what I had done,” he said.

He said he was relieved by Clinton’s response on the matter. “The governor put his arm on my shoulder and said ‘Marlin, don’t worry about the politics. I want you to be the best banking commissioner you can.’ He could not have been more supportive.”

For Jackson, who had been appointed banking commissioner by Clinton just a few months earlier, the incident was an important test of whether Clinton would allow him to operate independently as a regulator.

Bank records obtained by The Times show that Clinton repaid the balance on the loans from the Kingston bank beginning Sept. 30, 1983.

As it turned out, Clinton paid off more than $20,000 of the Whitewater loan by taking out a loan from the Security Bank of Paragould, Ark.--a bank on the other side of the state owned by banking commissioner Jackson. Jackson insists that he had put the bank in a blind trust when he was appointed commissioner and was unaware until years later that Clinton had borrowed money from his bank.

Jackson, who resigned as commissioner in 1987 and is now chairman of the Worthen National Bank of Conway, Ark., says he believes that tough lending rules imposed by the state prompted McDougal to shift the focus of his operations from his commercial bank to his savings and loan, Madison Guaranty, in order to take advantage of the more lax regulatory environment for thrifts that ultimately led to the nationwide S&L; crisis.

“I’ve often thought that the reason he began using Madison Guaranty (the S&L;) was because he had found that he couldn’t do what he wanted with his bank,” observed Jackson.