Mrs. Clinton’s Breaking of S&L; Ties Questioned

First Lady Hillary Rodham Clinton abruptly withdrew as a lawyer for Madison Guaranty Savings & Loan in 1986 just two weeks after her husband, then-Arkansas Gov. Bill Clinton, was notified that federal regulators were about to seize the thrift owned by his friend and investment partner, James B. McDougal, a congressional witness said Thursday.

Republicans on the Senate Whitewater investigating committee portrayed the sequence of events as proof that Mrs. Clinton was acting on confidential information obtained improperly from her husband when she broke off her representation of Madison Guaranty.

In testimony before the committee, Beverly Bassett Schaffer, former head of the Arkansas Securities Department, recalled her dealings with Mrs. Clinton involving Madison Guaranty. Although her testimony was generally favorable to the first lady, she contradicted Mrs. Clinton’s account of a 1985 telephone conversation between them about the thrift.

Schaffer told the panel that she sent a memo on July 2, 1986, to one of Gov. Clinton’s aides, advising him that McDougal’s savings and loan was in “serious trouble.” This memo preceded a decision by the Federal Home Loan Bank Board to remove McDougal from his position at the institution because of apparent financial mismanagement.

In her memo, Schaffer said that she was notifying the governor’s office of the impending action against Madison because she knew that Clinton and McDougal were friends. She did not know, however, that they were also investment partners in the Whitewater land venture.

Schaffer attached to the memo a confidential letter that Madison Guaranty had received from federal regulators threatening legal action to protect the assets of the thrift. In the letter, the regulators instructed Madison Guaranty to refrain from any new business transactions with a number of closely held subsidiaries, including one on which Mrs. Clinton had worked as a lawyer for the savings and loan.

At the time, regulators suspected that these subsidiaries were being used by McDougal to drain federally insured assets from Madison Guaranty. Three years later, the transactions would be blamed for the thrift’s financial default, which cost taxpayers $60 million.

After receiving Schaffer’s memo, according to committee Republicans, Sam Bratton, an advisor to the governor, wrote a memorandum alerting Clinton to the problems pending for Madison Guaranty.

It is not known whether the governor relayed this information to his wife, but Michael Chertoff, Republican attorney on the committee, said it appears that Mrs. Clinton acted on this information two weeks later when she resigned as attorney for the savings and loan.

When Chertoff questioned the propriety of Schaffer’s decision to pass the information along to the governor, the former Securities Department chief said that she routinely notified Clinton’s office whenever an Arkansas thrift was being threatened with legal action by federal regulators.

Republicans produced one curious, new piece of evidence relating to this matter: A memo written about the same time by Betsey Wright, Clinton’s chief of staff, in which she expressed concern that the governor might be linked to the financial problems at Madison because he and McDougal were co-investors in the Whitewater development.

Surprisingly, Clinton replied to Wright in the margin of her memo that he no longer owned part of the Whitewater development. He was clearly mistaken, however. He and Mrs. Clinton did not sell their stake in Whitewater until the early 1990s.

Schaffer also was questioned repeatedly about a telephone call that she received in April 1985 from Mrs. Clinton regarding Madison’s request for approval to raise capital by selling preferred stock.

Schaffer indicated that she and Mrs. Clinton also had a brief discussion of the merits of the request. Schaffer said she told Mrs. Clinton that Madison Guaranty would soon receive a letter from her department approving the request in principle.

Mrs. Clinton has said that she called Schaffer to ask her to designate someone within her agency to handle the matter. The first lady denies that she discussed the merits of the request.

Republicans argue that it was unethical for Mrs. Clinton to go to Schaffer, one of Clinton’s political appointees, seeking favors for her client.