Whitewater's Undercurrent of Cash Flows


Whitewater, the Arkansas land deal that has stirred so much controversy for the White House, is often dismissed by President Clinton as nothing more than a hapless effort to make a modest profit by building a dream retirement haven in the Ozarks.

"It's an investment I made 15 years ago that lost money instead of made money because the property market turned around at home," Clinton said recently. "It's a simple, straightforward thing, and it'll be shown to be."

But new evidence made public last week, taken together with what was already known, makes it clear that Whitewater was not quite that simple. While the President and First Lady Hillary Rodham Clinton--as they insist--may have known nothing about any wrongdoing, federal investigators have found substantial evidence suggesting that the land development firm was entangled in something that went well beyond selling lots for houses.

The Whitewater project, investigators now believe, was part of a labyrinthine system of financial juggling and speculation operated by James B. McDougal, a Little Rock, Ark., real estate developer who was the Clintons' financial partner in the Whitewater deal and the head of the now-defunct Madison Guaranty Savings & Loan.

Federally insured funds from McDougal's S&L;, which eventually collapsed at a cost of at least $47 million to taxpayers, allegedly moved so freely among his various enterprises--including the Whitewater project--that one federal investigator called the whole scheme a "massive check-kite."

The exact nature of the Clintons' involvement in the overall enterprise, and the extent of their knowledge about its affairs, remain uncertain.

Even though the Clintons' public statements and tax records indicate that they lost $46,635.75 as a result of their investment in the Whitewater endeavor, they were named as "possible beneficiaries" of McDougal's activities in documents forwarded to the Justice Department by officials of the Resolution Trust Corp., which investigated Madison Guaranty and related businesses.

For one thing, as McDougal struggled to conceal the fact that his financial empire was going bankrupt, as much as $100,000 was diverted from Madison Guaranty to the Whitewater project--money that taxpayers ultimately had to make up.

And with many of the records now missing, one investigative source speculated that "it may be that McDougal, in his head, has the only complete record of where the money came from and where it went."

What follows is a step-by-step guide to what is known and what is not known thus far about a relatively minor business investment that has turned into the most dangerous controversy in Clinton's career:

Not-So-Equal Partners

In 1978, the Clintons became partners with McDougal and his then-wife, Susan, in purchasing 230 acres of land along the White River in northern Arkansas. Together they obtained loans totaling $203,000 to buy the property. The money was borrowed at 10% interest, meaning that the partners were obligating themselves to pay at least $20,000 a year to keep from defaulting.

Out of their own pocket, the Clintons put up $500.

Although the development was said to be a 50-50 partnership between the McDougals and the Clintons, there was no signed contract between them, and the two couples never seem to have shared equally in profits or losses.

By Clinton's own account, the McDougals had contributed $268,000 and withdrawn $175,800 by 1992, for a net investment (and loss) of $92,200. That is almost twice what the Clintons claim to have lost on the deal.

In addition to repaying the two initial loans they took out to acquire the property, the partners had other Whitewater-related expenses. In the first two years after creating the Whitewater project, it has been reported that they spent $40,000 dividing land into 44 parcels, building gravel roads and printing brochures.

Exactly how the loans and expenses were covered on a monthly basis is not entirely clear.

While the lots did not sell as quickly as the owners had hoped, land sales did generate a steady stream of income for the company. Yet even after they officially shifted the ownership of the property into the newly created Whitewater Development Corp. in 1979, the McDougals and the Clintons say they frequently were forced to use personal funds to cover business debts and current expenses.

In 1978 and 1979 alone, the Clintons claim to have paid more than $22,120.60 in interest payments on the initial loan.

Then in 1980, Hillary Clinton borrowed another $30,000 at 20% interest from the McDougal-owned Bank of Kingston, Ark., in order to construct a model home on Whitewater lot No. 13. She borrowed it in her name; McDougal's bank was prohibited by law from making loans directly to any of his own business ventures.

The model home was sold in 1981 for $27,700, but it came back to them in 1988 after the buyer declared bankruptcy and died. Because the Clintons still owed $13,000 on the initial loan, they paid $8,000 to reacquire the property. It was then resold, and the Clintons reported a $1,640 capital gain after paying off the note.

The Clintons have said they were passive partners in the Whitewater project and that it was McDougal who ran the business on a day-to-day basis. But they have never explained why they did not share equally with the McDougals in Whitewater losses.

A Wider Scheme?

Many of these seemingly complex transactions, mixing personal and corporate obligations, are typical of closely held enterprises, but in other ways Whitewater seems to have been anything but a normal small business.

According to government investigators, tens of thousands of dollars passed through Whitewater accounts that bear no obvious relationship to the real estate development itself. These transactions are the source of the government's keen interest in the Whitewater project.

Investigators say they believe McDougal was using Whitewater Development--as well as many of his other companies--to drain federally insured money from Madison Guaranty in a scheme that may have robbed the thrift of hundreds of thousands of dollars. In a memo released last week, an RTC investigator estimated at least $100,000 in Madison Guaranty funds were funneled into Whitewater Development.

What portion of these funds from Madison Guaranty may have been used to pay Whitewater debts is unknown.

Some of the individual transactions appear to be perfectly legal. For example, the directors of a Madison Guaranty subsidiary company paid $30,000 into a Whitewater account in April, 1985, as a "bonus" to McDougal. Since McDougal controlled the company, he had a right to award himself a bonus, but the timing suggests what his purpose may have been: At the time, Whitewater Development owed a payment on its outstanding debt, and its account was overdrawn by $28,000.

Other transfers of money from Madison Guaranty to Whitewater Development raise unanswered questions. The RTC's chief investigator indicated that Whitewater Development also received "unauthorized" loans from Madison Guaranty.

One such transaction is already well known.

On Nov. 8, 1985, McDougal sent a check for $7,322.42 to the Security Bank of Paragould as a payment on the money originally borrowed by Hillary Clinton for the model home. Two years earlier, the Clintons had refinanced the then-unpaid balance of $20,000 on the loan through Security Bank, apparently to obtain a lower interest rate.

Although McDougal made the payment from Whitewater funds, the corporate account was nearly empty at the time. So he covered the check with a transfer of $7,500 in funds from a Madison Guaranty subsidiary that investigators say they believe was often used to siphon money from the thrift.

This transaction is cited by Clinton's critics as evidence that federally insured thrift money was improperly used to pay obligations owed by the Clintons. If so, the critics reason, the President and his wife are responsible for a small portion of the $47-million bill left behind for the taxpayers to pay when Madison Guaranty was declared insolvent in 1989.

Profit or Loss?

In 1992, when Clinton was running for President, he asserted that he had advanced a total of $68,900 to Whitewater Development--most of it in payments on loans taken out on behalf of the company--and received nothing in return.

Last week, however, he lowered that figure to $43,635.75. He said he had mistakenly included in the Whitewater total a loan of about $20,000 he took out to help his mother buy a house--a transaction completely unrelated to the Whitewater project.

The Clintons still adhere to the judgment of attorney James Lyons of Denver, who reviewed their Whitewater finances in 1992 and concluded that they had received no profit.

It is not known how much, if any, Whitewater money was used to pay off debts Clinton had incurred in his own name, but critics have suggested such funds should have been treated as income by Clinton and reported on his tax returns. The President did not list these payments as personal income on his taxes, apparently because he viewed them as corporate--not personal--debts.

Clinton's critics are intrigued by a statement that McDougal made in 1992 suggesting that the Clintons' obligations may have been satisfied entirely with corporate funds. "Every bit Clinton put in," McDougal said, "was income they didn't report."

Indeed, McDougal disagrees with much of the Clintons' accounting, but the credibility of the mercurial former thrift owner is itself in dispute.

The Clintons have already acknowledged they had erroneously claimed a tax deduction for Whitewater-related interest payments totaling $5,133 in 1984 and 1985. They said the mistake occurred because they personally received interest statements from the bank that should have been directed to Whitewater Development.

Predictably, these contradictions have caused Clinton's critics to question the President's arithmetic as well as his claim that the Whitewater project was a simple investment in which he lost money. On Thursday, Rep. Jim Leach (R-Iowa), who is conducting his own Whitewater probe, posed these questions:

"Did . . . the Clintons ever receive income from Whitewater? Why do the records show only that the McDougals did? How many personal interest payments did Whitewater make on the Clintons' behalf? Did the Clintons know whether other McDougal-related companies infused capital into Whitewater, and does this make the former governor indebted to McDougal's other partners or complicitous in any improper activities they might have been engaged in?"

Despite the apparent losses, Leach and others claim, the Clintons received something of value from the Whitewater project, at least in the form of debt forgiveness.

If the McDougals sustained losses larger than the Clintons' in an equal partnership, they also ask: Should the difference be considered a gift to the governor from the owner of a state-regulated business?

Furthermore, Clinton's critics note that the President benefited in another way by taking an $8,000 income tax deduction for interest payments he claims to have made on Whitewater-related loans.


In 1992, the Clintons sold their share of Whitewater Development to McDougal for $1,000. But they did not claim any Whitewater losses on their income tax filing that year, as they frequently did when they sold other unprofitable investments.

White House aides said the Clintons lacked the necessary documentation to claim a deduction. Neither Whitewater Development nor McDougal has filed tax returns for all of the years involved, also apparently because of a shortage of documentation.

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