Risky Ventures Marked Early Clinton Investing : Finances: Strategies of President, wife hardly fit safe pattern for young couples’ nest eggs. IRAs were ignored.

Shortly after they were married in 1975, Bill and Hillary Rodham Clinton decided, as the First Lady described it recently, “to create some financial security for our family.” Their goal, she said, was to accumulate enough money to educate their yet-unborn daughter, finance their own retirement and help their parents in times of need.

That explanation of the Clintons’ now-controversial financial affairs doubtless struck a responsive chord among millions of young, middle-class Americans.

Yet the investment strategies the Clintons pursued in the early days of their careers did not fit the traditional pattern of safe, predictable, mainstream investments chosen by most young couples who are seeking to build a nest egg.

They did not buy a permanent residence. They did not open individual retirement accounts until much later in their marriage. They did not build a portfolio of carefully chosen blue chip stocks.

Instead, their financial records show, the Clintons repeatedly put their scant resources into highly risky and speculative ventures: commodities futures, oil-drilling leases, limited partnerships and real estate speculation, among other ventures.

Their partnership in the Whitewater Development Corp. and Hillary Clinton’s wildly successful commodities trades--the two investments at the heart of the current investigation of the Clinton family finances--represent only a fraction of many investments that appear to have been designed more to strike it rich or to shelter income than to assure long-term security for the family.

In the early 1980s, for example, the Clintons made more than $45,000 by investing $2,014 in a cellular telephone franchise. They also earned a handsome return from investing in a highly exclusive stock fund with a reputation for buying on the margin and selling short. In addition, they enjoyed considerable tax advantages by investing in Forest Drilling Partners, a Colorado-based oil exploration company.

Of course, the Clintons were no ordinary couple. He, as governor, and she, as Arkansas’ First Lady and member of the state’s premier law firm, had plenty of knowledgeable people willing to help them with their investments. That kind of guidance can mitigate the risk most people would face pursuing such a high-risk strategy. And the Clintons did succeed.

Republicans and other critics charge that many of the Clintons’ investments smack of possible ethical or legal impropriety--receiving favorable financial opportunities from individuals and companies seeking favors from the state government, for instance. Those suggestions, which the Clintons have unequivocally denied, are being examined by a special counsel and a federal grand jury.

But whatever the outcome of the investigation, the pattern of the Clintons’ early investment activities offers fascinating insight into how they approached one of the most important issues any young couple must face--the question of financial security. And when it came to decisions like that, the Clintons were clearly not cut from common cloth.

Professional financial planners know from experience that, in any group of middle-class investors, there are always a few who say they want safety and security but who have the steely nerves and appetite to go after the big killing. Such investors would rather go for large gains, and risk large losses, than plod tortoise-like through a lifetime of small but safe steps toward financial security.

The Clintons appear to be among those who wanted to run with the hares.

“If you look at Mrs. Clinton’s investments, they are more aggressive than you might normally see with people in her income bracket,” said Bill Smith, owner of Smith Capital Management and Hillary Clinton’s primary investment adviser for the last 16 years.

“Look at Whitewater,” Smith said. “It was a high-risk, high-potential deal. And I’d put commodities trading and hedge funds in the same category. Anyone who uses leverage in their investing and uses shorting is rightly perceived as an aggressive investor.”

In part, analysts say, the Clintons’ investment strategy reflected their unique political lifestyle and the go-go impulses that prevailed during the late 1970s and early 1980s--particularly in Arkansas, where firms such as Wal-Mart, Tyson Foods Inc., J.B. Hunt Transport and TCBY Enterprises were growing rapidly and creating new wealth.

Moreover the Clintons moved in a small, elite circle of the state’s wealthiest citizens, many of whom were clearly willing to share their investment expertise with the aspiring young couple.

“It’s not uncommon in the circles in which they traveled to make those sorts of risky investments,” said Mark S. Rogers, a Little Rock tax attorney. “From the looks of their early investment decisions, they felt under pressure to live up to their reputation as rising stars.”

It was Jim Blair, Tyson Foods’ general counsel and a millionaire, who persuaded Hillary Clinton to enter the commodities market. And she has acknowledged that his guidance helped her parlay a $1,000 investment into $100,000.

Likewise, James B. McDougal, a real estate developer and former thrift owner, has said he cut the Clintons in on the Whitewater deal in hopes of helping them to get rich quick. David Watkins, an advertising executive and former Clinton political adviser, was responsible for recruiting Hillary Clinton to invest in the cellular telephone franchise.

As their financial records show, the Clintons began married life in debt. Not only was Bill Clinton still paying off loans for his education at Georgetown University, Oxford University and Yale Law School, but he also had gone $25,000 further into the hole to mount an unsuccessful campaign for the U.S. House in 1974.

During a term as attorney general and five terms as governor, Clinton himself never earned more than $35,000 a year. Prior to becoming President, he reported his highest annual income of $55,000 in 1981 from the law firm of Wright, Lindsey and Jennings, where he worked for two years after being turned out of the governorship after his first term.

Nor, it seems, did Clinton pay much attention to the family finances.

Thus it fell to Hillary Clinton to be the main breadwinner, money manager and investor. She went to work for the Rose Law Firm in 1977, receiving $14,800 in salary that year. Her compensation quickly grew and exceeded $100,000 by the time she left last year.

The First Lady said she chose to invest because she had grown up reading stock tables with her father, who taught her the value of “income and saving and investing.” At the time she began investing, Rogers said, the word among Arkansas investors was: “Buy Wal-Mart stock.”

Yet despite her upbringing and the popularity of such local issues as Wal-Mart, Hillary Clinton did not begin by buying stocks. In fact, she made many of her riskiest investments long before she had sufficient disposable capital to be sure of covering her potential losses.

In 1978, the same year Clinton was first elected governor, the couple’s combined wages totaled $51,173. Yet they put themselves in a highly precarious financial position by putting their money into two risky investments: Whitewater Development and commodities futures.

Even though Hillary Clinton was required to put down only $1,000 to begin trading in commodities futures, she herself has noted that she risked having to ante up thousands more had her trades been less successful. Likewise, to buy the Whitewater land, the Clintons and their partners, the McDougals, took out loans totaling $203,000 for which they were personally liable.

Also, between 1978 and 1981, Hillary Clinton purchased and sold 170 shares in DeBeers diamond mines in South Africa, with capital gains of $769. Her aides say the shares were purchased by her broker without her knowledge and were sold quickly because of her opposition to apartheid in South Africa.

In 1980, she put $6,500 into one of the hottest investments of that era--an oil-drilling partnership. Until tax laws were changed in 1986, investors in such partnerships could share personally in the tax deductibility of the venture, with the prospect of big profits if the drillers struck oil.

Zack Hager, director of investor relations for Forest Energy Inc. in Denver, said Hillary Clinton was one of about 1,700 people--including such luminaries as golfer Jack Nicklaus--who bought into the company’s first such oil-drilling partnership.

In 1983, she and two of her law partners, Vincent Foster and Webster Hubbell, put up $15,000 each to form a partnership known as Midlife Investors. Roy P. Drew, the stockbroker who set up the venture, said that by mutual agreement, the other partners--not their spouses--were designated as beneficiaries.

That same year, Hillary Clinton joined with a group of investors who obtained a federal cellular telephone franchise. In order to help the Arkansas Cellular group win the franchise, according to her fellow investors, Hillary Clinton not only bought a 2.5% interest with $2,014, but also personally guaranteed a $60,000 loan. When the franchise rights were sold to McCaw Cellular Communications Inc. for a profit of about $2 million, she got a check for $48,000.

In 1986, when Smith went into business for himself by creating Smith Capital Management, Hillary Clinton was one of the first investors in his Valuepartners fund, which buys stock on the margin and sells short. With 40 partners, it is a highly exclusive fund that is not marketed to the public. The Clintons’ current stake in the $8.7-million Valuepartners fund is about $100,000.

Even though Hillary Clinton’s investing gradually built her family nest egg into an impressive portfolio valued at something approaching an estimated $1 million today, many of her investments went sour.

Whitewater Development was by no means the only high-risk, speculative investment on which the Clintons lost money. Other losers included the partnership that owns the Rose Law Firm building, Forest Drilling Partners, Midlife Investors, Kaiser Steel preferred securities and an early venture in Hong Kong and Shanghai. She lost $2,532 in one day in 1987 with financial futures contracts.

The Clintons even lost money when they rented out a house they owned briefly in the early 1980s because the rent did not cover their mortgage payments. According to Lisa Caputo, Hillary Clinton’s press secretary, the couple owned three houses at different times during the first eight years of their marriage, but did not keep any of them for very long.

Because mortgage interest payments are deductible, a home is the primary investment of most middle-class Americans. Although the Clintons lived much of their married life in the Arkansas governor’s mansion, it is unusual for politicians not to have a permanent residence of their own.

As Rogers sees it, the Clintons made many investment mistakes in the early years of their marriage, but none as serious as their failure to take advantage of the law allowing couples to shelter up to $4,000 of pre-tax income in an independent retirement account, or IRA.

“That really glared at me when I read their tax returns,” he said. “Here are people with access to the best tax advice, and they made the worst decisions.”

Their failure to invest in IRAs until 1981 is particularly puzzling. Presumably the Clintons could have used the tax shelter during 1978 and 1979, when she made big profits in commodities. It is also unclear why the Clintons failed to take a capital loss on their taxes for the sum of about $40,000 they claimed they lost by investing in Whitewater Development.

It was not until the mid-1980s that the Clintons’ investment portfolio began to resemble the typical holdings of couples in their income bracket, with a combination of safer investments such as municipal bonds and more speculative ventures such as Valuepartners.

Hillary Clinton frequently denies that Whitewater Development or any of her investments created a conflict of interest for the governor, who was responsible for regulating securities dealers and all other industries doing business in Arkansas.

Nevertheless, Smith told The Times that during the 1992 presidential campaign he created “a de facto blind trust” for the future First Lady to protect her from allegations that by investing in pharmaceutical and other medical stocks, she stood to profit from her husband’s pledge to reform the health care system.

“I quit sending out reports on the securities in the partnership,” Smith said. “I did it to avoid any conflict of interest. I didn’t want them to be on the line.”

The Clintons did not put their investments into a blind trust until after they moved into the White House in January, 1993.

The Clintons’ Income

Despite relatively scant resources, the Clintons embarked on a high-risk investment strategy in the late 1970s that has paid off over time.

WAGES TOTAL INCOME FEDERAL TAXES 1977 40,856 42,626 8,194 1978 51,173 85,214 22,627 1979 74,236 158,495 58,388 1980 81,388 87,556 17,380 1981 106,448 110,601 25,886 1982 90,536 95,731 21,497 1983 116,857 123,787 30,196 1984 107,989 114,585 22,280 1985 90,382 102,407 18,791 1986 124,138 147,051 30,485 1987 133,358 165,890 36,969 1988 106,870 191,947 39,734 1989 146,444 199,000 37,883 1990 159,711 268,646 50,939 1991 147,887 237,576 49,828 1992 237,699 297,177 70,228 1993 191,640 293,757 62,670

Source: Clinton family tax returns