S&L; Funds Used for Clintons, Probers Say : Investigation: $7,300 in deposits was diverted to make a payment on a bank loan tied to the Whitewater real estate venture, GOP staffers say.

Federally insured deposits were diverted from Madison Guaranty Savings & Loan of Little Rock, Ark., in 1985 to make a $7,300 payment on a personal bank loan owed by then-Gov. Bill Clinton and his wife as part of their investment in the Whitewater real estate development, congressional investigators said Thursday.

James B. McDougal, owner of the thrift and the Clintons’ business partner in the Whitewater venture, used the Madison funds to make the payment on a loan that Bill and Hillary Rodham Clinton had obtained to build a model home on the site of the development, Republican staff investigators said.

If corroborated by the federal inquiry into the Whitewater deal, the payment would be evidence that federally insured funds were used to subsidize the Clintons’ controversial, ill-fated real estate venture with McDougal and his former wife, Susan.

The $7,300 payment was not a formal loan to the Clintons, the investigators said, but rather an informal payment that helped them at a time when the Whitewater development was experiencing difficulties. The development eventually failed and Madison was later closed by federal regulators in a bailout that cost the U.S. Treasury more than $47 million.

The Clintons, who became business partners with the McDougals in 1978, have said they were purely passive investors in Whitewater and were unaware of any improper or illegal actions by McDougal.

Republicans on the House Banking, Finance and Urban Affairs Committee, however, are pressing for a full public accounting of what they believe was a cozy business relationship between the then-governor and McDougal that may have permitted Madison to operate without strict state regulatory oversight.

“This is clear evidence of a small amount of fire amidst the smoke,” said Rep. Jim Leach (R-Iowa), ranking Republican on the committee, whose staff uncovered the transaction.

“Given the above circumstances,” said a memo written to Leach by his staff, “it would appear that federally insured deposits, which with the later failure of Madison became in effect taxpayer obligations, were transferred for the direct personal benefit of the former governor.”

The Clintons and Whitewater took a tax deduction for interest paid on the loan. White House aides have said it was an accidental double deduction. However, the new information may raise the question of whether the Clintons also failed to report the payment on their tax return as personal income.

As the memo to Leach noted: “What remains unclear is the larger question of whether the funds provided by Madison to reduce the Clintons’ liability were proper or properly reported as income for income tax purposes. . . .

“If Madison provided any direct or indirect assistance to Whitewater, presumably half the value of such (assistance) would redound to the advantage of each of the half-owners. In any regard, the above money transfer underscores that then-Gov. Clinton had personal liabilities reduced by a payment from Madison.

“Such payment presumably carries ethical as well as tax implications and is part and parcel of the $47-million to $60-million estimated taxpayer loss at Madison.”

McDougal, who became a friend of Clinton in the late 1960s, when both men worked for Sen. J. William Fulbright (D-Ark.), was removed from control of Madison in 1986 after federal regulators concluded that he had followed unsound practices. He was later tried and acquitted on charges of bank fraud.

Investigators found that McDougal sent a check for $7,322.64 to Security Bank of Paragould, Ark., on Nov. 8, 1985, to cover a payment due on a $20,800 loan that the Clintons had taken out earlier to satisfy the balance on another loan from an institution owned by McDougal, Madison Bank & Trust of Kingston, Ark.

Security Bank was owned by a Clinton-appointed state banking commissioner.

The check written by McDougal was drawn on a Whitewater account, even though the account did not have sufficient funds at the time to cover it, investigators said. McDougal later deposited a $7,500 check into the Whitewater account that was drawn on Madison Marketing, a subsidiary of the savings and loan.

According to a 1986 federal Home Loan Bank Board examination, Madison Marketing was virtually a sham entity used to divert money from the savings and loan to insiders, particularly Susan McDougal.