First Lady in Spotlight for Her Role in Whitewater : Inquiry: Her reputation as a top corporate lawyer seems to conflict with her purported naivete about high finance.

As the White House struggles to contain the controversy surrounding the First Family’s involvement in the tangled Whitewater real estate and banking affair, First Lady Hillary Rodham Clinton’s role has begun to raise as many questions as her husband’s.

Indeed, the Whitewater matter now seems to be a controversy befitting the Clintons’ modern, two-career political marriage: Just as the First Lady has played a critical role in major policy decisions on health care and other issues, she now finds herself a central figure with her husband in this politically threatening affair.

It is Hillary Clinton’s independent career as a top attorney in Little Rock, Ark., while her husband served as governor--and her reputation for being the financial brains of the household--that have prompted questions about her role in the Whitewater matter.

Even friends in Arkansas are wondering why she has not come forward with a fuller account of what she did and what she knew at the time the events in Arkansas were unfolding.

“I don’t know why she hasn’t been more open about explaining” her work as a lawyer for the defunct savings and loan at the center of the affair, said Beverly Bassett Schaffer, a former Arkansas state regulator and longtime acquaintance. “I don’t understand why they (the Clintons) were in business with someone like McDougal,” the thrift’s owner.

James B. McDougal, a friend of Clinton’s, owned Madison Guaranty Savings & Loan and was half-owner with the Clintons in an Ozark Mountain real estate venture called Whitewater Development Corp.

The President and Hillary Clinton have said they were innocent bystanders as McDougal drove his lending institution into the ground with a binge of bad loans and frittered away nearly $70,000 of their assets on the bankrupt Whitewater project.

Unresolved, though, is the mystery of how to reconcile this image of naivete in the world of high finance with Hillary Clinton’s reputation as a top corporate lawyer and board member of some of the nation’s biggest corporations.

The question being asked more openly in Washington and Arkansas is: How could Hillary Clinton--whom one legal journal called one of the 100 most influential lawyers in the United States--be unaware of gross mismanagement at a savings institution she represented as an attorney and neglect her family’s only substantial financial asset?

Those questions intertwine with a web of others as federal investigators continue their inquiry.

Specifically, they are trying to determine whether, amid the careening disorder in the runaway S&L; and Whitewater, money from a federally guaranteed thrift was diverted into Clinton’s 1984 campaign coffers. Also, there is the matter of whether the institution got favorable treatment from Arkansas authorities that helped keep it in business before federal regulators finally shut it down in 1989.

It is Hillary Clinton’s role as a former attorney for the savings and loan that has raised concerns about her actions.

McDougal, who worked with Clinton in Sen. J. William Fulbright’s office in the 1960s, bought Madison Guaranty in 1982 and soon began using it to make loans to important figures and to finance an assortment of speculations including his 4-year-old Whitewater venture with the Clintons, according to records filed with state regulators.

Before long, the S&L; was on dangerous ground, and in 1984 federal regulators warned that they considered its lending practices questionable. The Federal Home Loan Bank Board directed the S&L--along; with others in Arkansas--to raise more capital and put its house in order.

McDougal hit upon a quick way to raise money: selling stock. But that was not normal practice for savings and loans in Arkansas, and the proposal needed approval from the Arkansas Securities Commission. So McDougal had Little Rock’s Rose Law Firm--and specifically partner Hillary Clinton--make his case for the stock sale to state regulators.

The White House has acknowledged that Hillary Clinton, then on a $2,000-a-month retainer with Madison Guaranty, worked on the proposal in 1985. But senior presidential adviser Bruce Lindsey said her involvement was minimal and that most of the legal work was done by a junior associate, Richard N. Massey, then a 28-year-old, first-year lawyer at the firm.

Joe Madden, the current commissioner of the Arkansas Securities Department, said there are at least three Rose Law Firm documents to the commission that refer questions back to either Hillary Clinton or Massey. But he said the case was fairly routine and that a “competent first-year attorney (as Massey was at the time) could have been primarily responsible for doing the research and doing the drafting.”

Schaffer, who had just been appointed securities commissioner by then-Gov. Clinton when the case arose, said Massey handled meetings with her staff and that Hillary Clinton was the only senior attorney at the Rose firm with whom she or her staff communicated.

Ultimately, Schaffer and her staff decided that the unusual capital-formation plan did not violate Arkansas law and approved it. Because of its growing financial problems, though, the plan was never carried out by the thrift.

Schaffer, now an attorney in private practice in Fayetteville, Ark., said she did not feel pressured to rule favorably because the governor’s wife was involved in the case.

But she expressed frustration at her old friend’s seeming hesitation to publicly explain her role as a senior attorney in the case and thereby allow suspicions to grow.

Repeatedly, Hillary Clinton has insisted that questions arising from private matters a decade or more ago are not a fit subject for public scrutiny. She has refused to respond to any detailed inquiries, including the central one: whether it was proper to represent a business partner before a state regulatory board run by a personal friend and appointee of her husband’s.

She has expressed bewilderment that the press and investigators are interested in the aftermath of a money-losing private real estate investment.

Jack Pitney, a political scientist at Claremont McKenna College in Claremont, said the First Lady’s response created a credibility problem. It is difficult, he said, to believe she would ignore a major family investment and overlook a potential conflict of interest.

“She can’t just throw her hands in the air and say she doesn’t understand all this legal stuff. She can’t claim ignorance of legal details,” he said. “It is not a credible defense. Her involvement is a fix of her own making.”

Friends and associates said the two images of Hillary Clinton--meticulous lawyer and absent-minded investor--are not mutually exclusive. While she was a keen professional at work, she had little interest in acquiring wealth or closely monitoring her family’s finances, according to her defenders.

Lindsey, a longtime Arkansas friend of the First Family, said the Clintons got into the Whitewater deal on the assumption that McDougal would manage the property and the Clintons would simply make payments periodically on loans taken out to purchase the undeveloped land.

“They went into a real estate development with a developer with the clear understanding that he would manage the investment and with the clear understanding they would be passive investors,” Lindsey said.

“When they were asked to write a check to Citizens Bank of Flippin (Ark.) or even to the McDougals when McDougal said there weren’t sufficient funds from property sales to cover that month’s mortgage payments, that didn’t seem unusual.”

He said the Clintons were aware that the property appeared to be losing value, but rather than questioning McDougal or seeking detailed financial statements on the deal, they just wrote it off as “bad business judgment,” Lindsey said.

Another family friend’s assessment is that neither of the Clintons was interested in getting rich; they concentrated through the 1980s on Clinton’s political career and his wife’s policy crusades.

“They don’t know beans about business,” said this Arkansas friend, who asked to remain nameless.

According to McDougal, the Clintons early in 1985 expressed interest in Madison Guaranty’s affairs--as well as their personal enrichment--and sought the thrift’s legal work for the Rose Law Firm. McDougal said he put Hillary Clinton and the Rose firm on the $2,000-a-month retainer at then-Gov. Clinton’s request--a claim the White House has denied.

In 1988, when Madison Guaranty clearly was on the verge of failure and McDougal was suffering personal problems, records show that Hillary Clinton wrote to McDougal to seek power of attorney over all Whitewater-related business.

She received that power but apparently did not use it until 1992, when she authorized Rose firm law partner Vincent Foster to work on Whitewater’s delinquent tax returns.

In an unrelated case, she took a distinctly active role in a family investment involving much less money. In 1983, she, Foster and Webster L. Hubbell, another law firm partner, formed an investment partnership called Mid-life Investors, with each contributing an initial $15,000.

Roy P. Drew, a stockbroker who helped them set up the venture, said neither Foster nor Hubbell later expressed much interest in the performance of the partnership but that Hillary Clinton called frequently to ask about her investment, at times phoning him daily with questions and instructions.

The partnership eventually foundered, paying annual dividends of between $2 and $20 from 1986 to 1992, according to the Clintons’ income tax returns. Lindsey, who follows the Clintons’ personal business closely, said he knew virtually nothing about Mid-life Investors except that it was an insignificant part of the family’s portfolio.

Some of the White House defensiveness about Whitewater questions over the last three weeks can be attributed to concern for Hillary Clinton’s potential exposure to political damage.

The chief item on the White House agenda for 1994 is the health care reform initiative, which the First Lady has headed.

White House aides--and ultimately the Clintons--concluded this week that until questions are resolved about the First Family’s business matters, little progress can be made on affairs of state, officials said.

“There ain’t going to be no health care campaign if they don’t get Whitewater out of the way,” said Betsey Wright, Clinton’s former gubernatorial chief of staff and an informal adviser.

Times staff writer Thomas B. Rosenstiel contributed to this story.

* WHITEWATER CHRONOLOGY: A look at the Clintons’ involvement in the Arkansas real estate and banking venture. A18