• U.S.


62 minute read
James B. Stewart

SUSAN MCDOUGAL STRETCHED HER legs in the ample passenger space of her husband Jim’s light green Mercedes 280-S as it cruised north along the winding Route 65 to the resort town of Eureka Springs, Arkansas. It was a mild, brilliantly sunny winter day in early 1978. Susan was wearing bell-bottom pants and a tight white tank top; she knew her husband liked the impression she made as they traveled along the rural highways. Susan gazed out on the rugged hills of north-central Arkansas and thought how pretty it was. They passed occasional signs advertising campgrounds and raft trips down the White River. With the mild winters and scenery, McDougal was convinced that real estate in the area would be attractive to growing numbers of retirees. Jim and Susan McDougal were always on the lookout for real estate deals.

The big Mercedes was one of her husband’s few indulgences. Given the money they were making, the McDougals didn’t live lavishly. Jim seemed indifferent to most of the trappings of wealth, but he loved clothes and cars, especially Mercedes. Before the 280-S he had owned a yellow 450-SL convertible. While driving with one of his close friends, future Arkansas Governor Jim Guy Tucker, he managed to beach the car on the dividing strip of North University Street in Little Rock, stopping traffic during rush hour. McDougal was unfazed, chatting with Tucker as though nothing had happened. “Don’t get out and look around, giving everyone the satisfaction of seeing what an idiot you’ve been,” he told his passenger. “Don’t worry. Somebody will come and take care of this.” (Someone did.)

It was one of the many ways in which McDougal seemed to live on a higher plane than ordinary mortals, and it was one of the qualities that had dazzled Susan when, as a 19-year-old student at Ouachita Baptist University in Arkadelphia, she first met McDougal, 15 years her senior. McDougal, who cut quite a figure around campus with his Savile Row suits, straw hats and aristocratic accent, was teaching political science there, an interlude in a career that had included stints as an aide to Arkansas Senators John McClellan and J. William Fulbright. After a yearlong courtship, Jim and Susan were married in Little Rock in May 1976. Among the guests: a promising pol then running for Arkansas attorney general named Bill Clinton and his wife Hillary Rodham. McDougal had met Clinton on the Fulbright Senate campaign in 1968, and they quickly became friends.

This weekend was supposed to be a quiet getaway. But after the McDougals arrived and checked into their hotel for the night, they awoke the next morning to discover that a freak snowstorm had blown in overnight. Jim wanted to stay in, and in no time, Susan noticed, was scanning the real estate ads in the local paper. Suddenly he looked up with a gleam in his eye. “Look at this,” he told Susan. “Twelve hundred acres in Marion County for less than $100 an acre.” It struck him as an amazingly good deal. “Is there any land in America that could be worth less than $100 an acre?” They bought the land within a week, sight unseen.

The next weekend, Chris Wade, the owner of Ozarks Realty in Flippin, looked out his window and saw a large Mercedes pull into his lot. Hardly anyone in Flippin (pop. 1,000) drove an import, let alone a Mercedes. Out walked Jim McDougal, impeccably dressed in a dark suit even though it was the weekend, and Susan in a tank top. The two came in and announced they had just bought 1,200 acres nearby. Wade pointed out that the acreage consisted of scattered parcels, some of them lacking road frontage or access. McDougal was impressed that Wade seemed to know what he was talking about. He listed the land with Wade for immediate resale.

As McDougal saw it, there was little risk. He had a half-dozen real estate developments under way, and he needed an outlet for the growing cash flow they were generating. In any event, McDougal didn’t expect to own the property for very long. Even as he reached an agreement to list the parcel, he told Wade to divide it up and sell the individual pieces. Wade was able to sell all of them by the time McDougal closed on his own purchase, netting McDougal a handsome profit without ever having put his capital at risk.

McDougal was an old hand at this game; he had even helped his old boss, Senator Fulbright, make some money by cutting him in on a land deal in 1974. Fulbright was thrilled, and word soon spread among the Senator’s circle of McDougal’s financial acumen. Later McDougal spotted a small plot near Little Rock, and, almost offhand, mentioned it one day to Clinton. “You ought to buy this, Bill,” McDougal said. Clinton knew of McDougal’s success with Fulbright and was interested. He was still paying off student loans he’d taken to finish Yale Law School, and he was $24,000 in debt from an unsuccessful 1974 campaign for Congress. Still, Clinton knew next to nothing about real estate, mortgages, or finance. McDougal was amazed that a Rhodes Scholar and Yale law graduate seemed to know so little about business and money. Clinton went in on the five-acre investment, paying $500 down and sending a monthly payment of $75, which he did conscientiously.

In 1976 Clinton won his race for attorney general, and he and Hillary moved to Little Rock into a house at 5419 L Street just west of the State Capitol. While the house was small and unpretentious, its purchase took all the financial resources the couple could muster. Hillary went to work for the Rose Law Firm, arguably the state’s most prestigious, at an associate’s salary of $24,500. As attorney general, Clinton earned a meager $26,500.

The McDougals and Clintons often dropped by each other’s houses or bumped into each other at the Black-Eyed Pea, a blue-plate restaurant featuring Southern food located just minutes from each of their homes. McDougal and Susan would sometimes mention their successful real estate operations; Susan had even obtained a real estate license and was working as a broker. The Clintons, by contrast, complained that they could barely make ends meet. But at least Clinton’s small land investment worked out well. In 1978, just as Clinton was starting to mount his campaign for Governor, McDougal was able to sell the tract for $5,000, a 75% return on their initial investment of $2,850.

That summer, when Chris Wade happened to mention that he had a new listing he thought might interest McDougal, the Clintons’ finances were on McDougal’s mind. He mentioned to Wade, “I’d like to do something to help Bill Clinton. He’s starving to death as attorney general. I’d really like to see him make a little money.” McDougal said he’d jump in the car with Susan and come up.

“Take a look at this,” Wade said when the McDougals arrived in Flippin after the three-hour drive from Little Rock. A group of local businesspeople, shareholders of the 101 Development Corp., had just listed a parcel of 230 acres along the White River, about a 20-minute drive from Flippin. The group had bought the property after the prior owner had fallen into bankruptcy. McDougal was intrigued, especially because the acreage had a lot of frontage on the White River. The river descends through the rugged terrain of north-central Arkansas and has stretches of white water, making it popular for rafting expeditions and with fishermen. Like McDougal’s previous investments, the large tract seemed ideal for subdividing and reselling as individual lots.

The McDougals told Wade they were interested, and wanted to talk to the Clintons and maybe some other potential investors about it. They weren’t told that the price per acre of nearly $900, a total of $203,000, was more than double what the 101 group was paying for it in a deal that hadn’t even yet closed. As with his earlier deal with Wade, McDougal wanted to move quickly, listing the individual lots for resale as soon as possible, even before closing. He didn’t see the investment as more than a two- or three-year venture.

Not long after their trip to Flippin, Jim and Susan bumped into Bill and Hillary having dinner at the Black-Eyed Pea. Jim started telling them about the great piece of property he’d just stumbled upon near Flippin. “You’ll want to go in with us on this,” McDougal confidently predicted.

“What do you have to do?” Bill asked.

“I’ll take care of it,” McDougal said. “You may have to sign a mortgage.” McDougal explained that the investment would involve little or no cash; they’d borrow the full amount and flip the land as quickly as possible. Both Bill and Hillary seemed excited at the prospect of making some money and agreed on the spot to join in the venture.

Given that Wade was a founder and director of the Citizens Bank & Trust Co. of Flippin, it wasn’t surprising that McDougal turned there first to finance the purchase of the 101 tract, with Wade’s encouragement. The loan officer was a young senior vice president, Frank Burge, who was soon to be named president of the bank. The president then was James Patterson, who happened to be one of the investors in 101 Development Corp., which was selling the land.

Given the incestuous relationships (prohibited under current banking laws), it’s surprising the application didn’t breeze through the approval process. Despite its small asset base and remote location, the bank in Flippin was conservatively run. By its standards, a $200,000 loan was a big deal. Burge was also concerned that the small bank had too many loans outstanding in this single area around the White River, since the bank had also financed some of the 101 Development Corp.’s purchase of the larger parcel from which the 230 acres were being carved.

Burge discussed his concerns with the bank’s board members. They were, of course, aware that Clinton was likely to be the state’s next Governor. They were flattered that he was interested in investing in their part of the state, and even more flattered that, as McDougal informed them, Bill and Hillary were planning to use one of the lots for their own vacation home. Nonetheless, the bank insisted that the McDougals and Clintons come up with a 10% down payment. It also insisted that all the owners, including both Bill and Hillary, be jointly and severally liable for the mortgage. The terms were easily enough satisfied. McDougal and Bill Clinton simply borrowed the down payment from another bank, Union National Bank of Little Rock, where McDougal had been borrowing since 1970. The bank sought no security for the loan.

The McDougals and Clintons didn’t tell Citizens Bank that they were borrowing the down payment. The Clintons agreed to cosign the mortgage and appear at the closing. The risk seemed minimal given the speed with which McDougal expected to resell the property and pay off the mortgage. The loan would be short-term–principal and interest due in six months–and the interest rate would be 10%.

The closing was set for Aug. 2, 1978, at 10 a.m. Despite bank policy requiring the attendance of all borrowers, the Clintons didn’t attend. With a flurry of checks, documents and signatures, the closing was soon over, with Jim and Susan, Bill and Hillary equal owners of the 230 acres, jointly and severally liable for the mortgage debt and interest. Susan christened the property White Water and produced an eight-page marketing brochure with over a dozen full-color photographs.

“Now this is what most folks think of as White Water,” the brochure concludes over a photo of sun-dappled water and babbling falls. “Clean rippling water and stepping stones–but it’s really so much more. More than a place to live, it’s a way to live … quiet, peaceful, serene, simple and honest. One weekend here and you’ll never want to live anywhere else.”


AS BILL CLINTON’S POLITICAL CAREER began to flourish, Hillary became determined to have a child. “You can’t be a woman if you don’t have children,” she told a friend. “It’s the central mission of women. It’s too great, it’s too important not to experience it.” And for Hillary, having a child was inextricably entwined with paying for education and other expenses. It was one thing for her and Bill to live simply; it was another to provide the things she would want for a child.

By now it must also have been obvious that Hillary couldn’t count much on financial contributions from her husband, given his earnings prospects and lack of interest in making money. At semiannual meetings with William Smith, a Little Rock broker with whom Hillary had set up two accounts–one with her husband, one just for herself–in the late 1970s, it was Hillary who asked nearly all the questions. Bill, by contrast, showed little interest in the account’s growth and would ramble on about political developments, comments that left Smith puzzled as to their financial relevance.

Hillary’s worries about money also led her to follow the advice of a good friend named Jim Blair, an Arkansas lawyer and investor who urged her to open a commodities account in the fall of 1978. With Blair’s guidance, Hillary parlayed a $1,000 investment into nearly $100,000 in less than a year.

According to friends of the couple, it was also at this time that Hillary expressed doubts about the future of her marriage and, as a result, whether she could count on Bill to support her and a child. Their marriage, now in its third year, was, by the Clintons’ subsequent admission, at a low point. If Gennifer Flowers can be believed, she and Bill were in the passionate, early stages of their affair during the summer of 1978. People close to the Clintons were aware of other women in Bill’s life; they believed Bill had been unfaithful to Hillary even during their engagement.

Bill seemed to flaunt his interest in certain women. One summer he liked to run with Pat Wyatt, who was locally renowned as a founder of the Marquis de Sade running club. When he’d return from their runs, he couldn’t stop extolling her virtues to his wife. (Wyatt denies any romantic involvement with Clinton.) Hillary would typically say nothing then. But later there would be arguments, shouting matches, a thrown shoe or two. Both Bill and Hillary had volatile tempers, which they didn’t hesitate to inflict on each other. To longtime observers, it was an essential dynamic of their relationship, and the fights were often followed by loving reconciliations. But privately, Hillary expressed pain and dismay. She sought out the husband of one close friend, trying to understand why Bill would be so unfaithful. Did he cheat on his wife? Did he know other men who did? How should she react? How should she feel? Hillary seemed in equal parts puzzled and hurt.

Bill and Hillary’s move to the Governor’s mansion in January 1979 did little to ease these anxieties. He confided in Susan McDougal that he loved being Governor: “This is fun. Women are throwing themselves at me. All the while I was growing up, I was the fat boy in the Big Boy jeans.” At an inauguration party, Susan had seen Bill Clinton disappear from the party with a tall blond woman in tow. Hillary was putting on a brave face, but the incident was stirring up a buzz, and Susan could tell she was upset. She went over to commiserate with the state’s new first lady, sharing an observation she’d got from Betty Tucker, wife of then Congressman Jim Guy Tucker. “Betty told me,” Susan confided, “that it doesn’t change from the local, to the state, to the federal level. The girls just get prettier.”

By the summer of 1979, Hillary was so eager to have a baby that the Clintons contemplated visiting a doctor at the University of California, San Francisco. The trip proved unnecessary: Hillary became pregnant that summer and gave birth to Chelsea Victoria on Feb. 27, 1980.


SHORTLY AFTER CLINTON BECAME GOVERNOR IN 1979, MCDOUGAL joined the Administration as an economic adviser. Whitewater was not going well: a year after the land had been bought, not a single lot had been sold, and a survey had yet to be completed.

Though nobody focused on it at the time, the economic prospects for Whitewater were rapidly fading. Essentially an impulse purchase from the outset, the returns were never likely to be all that high. The original tract of 230 acres, for which they paid $203,000, was carved into 44 lots, whose combined list prices (which in practice would never have been realized) amounted to $459,000. With estimated development costs and interest of $93,000, less commissions and closing costs of 15% of sales revenue, the net proceeds would have been a maximum of $95,000 to be divided between the Clintons and McDougals.

For some of the improvements to the property, McDougal had simply written a check on the account of his and Susan’s company, Great Southern Land Co. But he’d asked the Clintons for payments during the first year that totaled $22,620, a negative cash flow for the Clintons of nearly $2,000 a month.

The whole thing was deeply embarrassing to McDougal. Here he’d brought the Clintons in as a favor, and the investment was turning sour. Thus it was with considerable excitement that McDougal told Bill and Hillary of the project’s first sale, one of the lots bordering the river, in September 1979. Within six months, they’d sold five more lots. But the down payments on the lot sales barely covered Wade’s real estate commissions and the closing costs. At the end of May 1980, with the Citizens Bank loan up for renewal and the next quarterly interest payment of $4,352 due, Whitewater Development Co. had less than $2,000 in cash. By this point, the McDougals had invested nearly twice as much as the Clintons.

While the Clintons may have been unaware of the financial details of the venture, they were keenly interested in whatever tax breaks they could extract from it. One afternoon in the Governor’s office, Bill mentioned to Jim that he should “talk to Hillary about taxes because she and Jim Blair have made some money in commodities.”

The next time Hillary dropped in, McDougal asked her about it, and she told him that both she and Blair had been quite successful and that she was looking for some kind of tax shelter. Hillary pressed Jim to see how much in interest payments from Whitewater she could deduct from their taxes, arguing that she and Bill were entitled to a full half of the interest payments. But it was McDougal who was making a disproportionate share of the interest payments and was thus entitled to the deduction. Jim finally burst out, “Goddamn it, Hillary, didn’t they teach you in law school that you can’t take a deduction for something you didn’t pay?”

McDougal might have added that you can’t take a deduction for everything you do pay–only for payments of interest and legitimate business expenses. Yet, in a pattern that would continue, the Clintons deducted $10,131 on their 1978 tax returns, describing it as an itemized interest expense, to shelter some of the commodities profits. The Clintons had written a personal check in this amount to the McDougals’ Great Southern Land Co. on Dec. 28, and the payment was reflected in the Whitewater accounting ledger as an “adjusting entry.” But Whitewater apparently didn’t pay anywhere near that much interest in 1978, and no documentation from the banks was offered to support such a claim.

While the 1978 deduction might be characterized as a misunderstanding, the Clintons were even more aggressive in 1979. They made Whitewater payments totaling $12,490 that year and deducted all but $500 of it as itemized interest expenses described as “bank loans” and “Jim McDougal.” Of their payments, $2,900 consisted of an advance and paid-in capital, which would not be deductible. Another payment of $4,600 went to Great Southern Land Co., ostensibly for reimbursement of interest payments. (The Clintons’ 1979 tax return was audited by the irs and was approved without change, indicating that the agency accepted the Clintons’ explanations. The White House maintains that the 1978 and 1979 deductions were proper.)

AS THE SUMMER OF 1980 UNFOLDED AND THE DATE OF ANOTHER interest payment drew closer, Whitewater lot sales came to a halt. Meanwhile, McDougal soured on his job in the Clinton administration. Faced with some legislative setbacks, Bill seemed dispirited; as Hillary explained it to press secretary Julie Baldridge, “If I didn’t kick Bill Clinton’s ass every day, he wouldn’t be worth anything.” McDougal began to have his own run-ins with Hillary, so he quit.

In partnership with several others, he bought a bank in Kingston and rechristened it Madison Bank & Trust Co. Without telling the Clintons, he took out yet another loan in his own name to retire the $20,000 Union Bank loan that he and Bill had borrowed to make the Whitewater down payment. In late summer of 1980, however, the actual mortgage from Citizens Bank had to be retired or refinanced, and the bank insisted that McDougal and Clinton pay down 10% of the outstanding principal and agree to a regular repayment schedule to retire the principal. The Clintons paid $9,000 in principal and $4,350 in interest. As they had in the past, the Clintons deducted all the payments on their 1980 tax returns, including the $9,000 payment of principal. By now, the Clintons had paid almost $36,000 in cash for their stake in Whitewater.

To help spur sales, the McDougals convinced the Clintons that a model home should be built on the property. McDougal arranged the purchase of an exceedingly modest two-bedroom prefabricated house for a little over $20,000; installation on Lot 13 brought the costs to over $28,000. Whitewater had its first home.

Other than occasional calls and the need to sign papers, the McDougals and the Clintons had little contact once Jim left the Governor’s office. The McDougals paid little attention to the 1980 gubernatorial campaign that fall; they assumed Clinton would easily win re-election. The morning after the election, Jim McDougal was in the shower when the phone rang. Susan answered. It was Hillary Clinton, and she was croaking, her voice barely recognizable.

“Let me talk to Jim,” Hillary said. Ordinarily Susan wouldn’t have interrupted her husband’s shower, but Hillary sounded as if it was urgent.

“It’s Hillary Clinton,” Susan called out. “She sounds terrible.” Dripping wet, Jim got on the line.

Hillary said they’d lost the Governor’s race. Bill was too depressed to get on the phone. “You need to send us money,” Hillary said, sounding desperate. “We need it now, and we need all you can send.” Jim said he was sorry and stunned by the news, and he’d see what he could do.

Susan was sympathetic to the Clintons’ plight. They didn’t even own a house, and she knew Whitewater was a strain. But Jim vowed he wasn’t going to send the Clintons any money beyond subsidizing them on Whitewater. He thought Clinton had blown it, and deserved to lose. More to the point, the McDougals were strapped for cash themselves. So McDougal decided he had to sell Lot 7 on the Whitewater property, the largest plot along the river and the one reserved for the Clintons’ eventual use. It was unlikely that the Clintons ever seriously intended to use the parcel, which they’d never seen. Eager to raise cash by the date of the next payment to Citizens Bank, he agreed to sell the land to Chris Wade, the broker for the development, for $33,000.

McDougal was happy to get an infusion of cash, nearly all of which was used to pay down the outstanding principal of the Citizens Bank loan. Then, to replace the advance he’d made to finance the construction of the modular home, McDougal arranged for Hillary to borrow $30,000 from Madison Bank and take title to the property. The loan would be repaid, he assured her, using proceeds from the sale of the house. She agreed, and henceforth the modular home on Lot 13 became known as the Hillary house.

Though McDougal didn’t intend this to be the effect, the transaction exposed Hillary to considerable personal liability on the loan, which carried an interest rate of about 20%. The Clintons remained oblivious to Whitewater’s true financial picture, as shown in a letter Hillary sent to McDougal in the fall of 1981, along with a signed loan-renewal form: “If Reaganomics works at all, Whitewater could become the western hemisphere’s mecca. Give our regards to Susan and we to hope to visit soon.”

But that extraordinarily optimistic view of Whitewater’s prospects was soon drawn into question. In August 1982, a loan officer at Madison wrote Hillary that she was past due on paying back the loan McDougal had got for her to finance the model home. Eventually Bill Clinton himself borrowed over $20,000 from the Security Bank of Paragould, whose former president, Marlin Jackson, was Clinton’s bank commissioner, and applied the proceeds to reduce Hillary’s debt. (That amount, however, did not wipe out her debt entirely. It isn’t clear who paid off the several thousand dollars remaining, but Madison Bank retired the loan.) Jackson was aware of McDougal’s questionable activities, and had warned Clinton that McDougal might be running afoul of the state’s banking laws. But Clinton apparently ignored the warning.

By this point, surely even the Clintons realized that Whitewater was proving to be a disastrous investment. They had to borrow another $20,000 from Citizens Bank (a note the Clintons and the McDougals signed personally) at 14.5% just to cover interest payments on the original Citizens loan. Existing revenues weren’t nearly sufficient to cover interest expenses, which kept rising as notes were renewed at higher rates and new notes taken on. So far, the partners had kept their fingers in the dike by continuing to borrow from friendly bankers or the bank controlled by McDougal. But this was little more than pouring good money after bad. If the lending dried up and all the notes were called at once, the Clintons and McDougals faced a financial crisis just as Clinton was plotting a political comeback. McDougal was desperate to find a new source of funds.


MCDOUGAL FOUND HIS NEW FUNDING IN JANUARY 1982 by buying a controlling interest in the Woodruff County Savings & Loan Association in Augusta, Arkansas. Since new laws allowed S&Ls extraordinary latitude in making loans with their federally insured deposits, McDougal began buying more land and building developments. He also renamed the S&L, once again turning to a favorite President for inspiration: Woodruff became Madison Guaranty Savings & Loan. He opened a flagship office in Little Rock and began seeing the Clintons socially again (Bill had won back the Governor’s job in 1982). Thus McDougal happily agreed to hold a fund raiser for Bill at his S&L in April 1985. The event raised $35,000.

Meanwhile, Hillary was trying to build up the fledgling litigation practice at Rose. She, like her litigation partners Vincent Foster and Webster Hubbell, were at a disadvantage: those partners who handled corporate clients tended to get the lion’s share of compensation, and the only way Hillary, Foster and Hubbell could improve their pay was to bring in more clients.

Given the firm’s emphasis on generating new business and Madison’s increasing visibility, it’s not surprising that Rose lawyers eyed it as a potential client. Rose hadn’t done any work for McDougal since an ill-fated 1981 suit involving Madison Bank & Trust, when McDougal had been so annoyed by Rose’s handling of the case that he refused to pay its bill. Hillary thought a direct appeal to McDougal would work, which prompted a 1983 letter to McDougal from Rose’s chief executive. Though Hillary herself hadn’t worked on the 1981 matter (Vince Foster was the partner in charge), the letter indicates she tried to collect the $5,893 account receivable. Despite Hillary’s ties to the McDougals, the effort hadn’t resulted in any payment.

Despite this, Richard Massey, an associate at the Rose firm who specialized in securities law, and a corporate partner at Rose, David Knight, hoping to land Madison business, had lunch in the spring of 1985 with John Latham, whom McDougal had hired as Madison Guaranty’s chief executive officer. But the lunch proved fruitless: Latham said Madison already had outside counsel and didn’t plan to hire others.

But there was another route to McDougal: Hillary. The previous August, one particularly hot morning, Bill had dropped in on McDougal during one of his jogging sessions, and conversation had shifted to Hillary and her situation at the Rose firm. Hillary had been complaining to her husband that she was under pressure from her partners to generate more business, which was hard for her because she had so many duties as the state’s first lady. Hillary had been griping about this, which was getting on his nerves, he told McDougal.

During this conversation, McDougal noted with mounting distaste that the Governor, drenched from his run, was dripping sweat all over the chair. It was a new chair, in light blue leather, that Susan had just given him as a birthday present. McDougal had been suffering from lower back pain, and the chair was orthopedically designed to support his back.

“If we send some business to the Rose firm, will that help Hillary?” McDougal asked, wondering what else he could say to get Clinton moving before his sweat did any more damage to the upholstery.

“Yes,” Clinton replied.

McDougal rose at that point, as did Clinton, and McDougal gently steered him out of the office. Susan’s brother Bill Henley was standing nearby. With the Governor safely out of earshot, McDougal turned to Henley. “I don’t mind the fat little son of a bitch coming by and taking up my time. I just wish he wouldn’t ruin my chair.”

Soon after Clinton’s visit, Jim mentioned to Susan that “Bill was here, and Hillary seems to be having problems. She doesn’t get along well with people, you know. She’s a Yankee. Let’s send her some of the S&L business.”

Rose records don’t indicate any Madison Guaranty payments in the immediate months after the meeting between McDougal and the Governor, but the following spring, Hillary scheduled a visit with McDougal, arriving late in the morning of April 23. After his experience in the Governor’s office, McDougal wasn’t nearly as enamored of Hillary as he had once been, but they were still cordial. After some pleasantries, Hillary mentioned that her husband had suggested she stop by. “Fine,” McDougal said. Honoring his commitment made earlier to Bill, he said, “I’m sending you some work.”*[1]

Hillary suggested Madison Guaranty pay the firm a monthly retainer, and McDougal seemed surprisingly amenable. “Two thousand a month should cover it,” he suggested. The details he’d leave to Latham, McDougal added, though he assumed Hillary would be the partner in charge and would get credit within the firm for the business. As he saw it, the whole matter was a favor to the Governor.

The turn of events came as a surprise to Massey, the Rose associate who ended up doing most of the work. Latham called Massey shortly after to discuss a stock offering the S&L wanted to make. It was the first Massey knew of Madison Guaranty’s having become a client.*[2]


THOUGH HARDLY THE LARGEST OF THE MCDOUGALS’ headaches, in microcosm the Whitewater venture illustrated all the major trends troubling the McDougal empire. In 1983 no new lots had been sold. Because of all the interest payments, negative cash flow that year was nearly $51,000, all of it covered either by new borrowing or payments from McDougal or his various ventures. One lot was sold in 1984. Negative cash flow was over $20,000, all of it covered by McDougal. With more interest and principal payments due, 1985 was even worse. Only one lot was sold. Negative cash flow was over $75,000, requiring even more payments from McDougal. At about the same time he was retaining Hillary and the Rose firm, McDougal had Madison Financial, his S&L’s investment subsidiary, pay him a “bonus” of $30,000, payable to Whitewater, according to minutes of a Madison board meeting. The money was deposited directly in the Whitewater account, the one instance where money went directly from Madison into Whitewater. The Clintons weren’t asked for, nor did they make, any payments during those years.

In May 1985, realizing that Whitewater could be a drain forever, McDougal decided to sell the remaining lots to Chris Wade, the Whitewater broker who had bought Lot 7. The payment: the assumption of $35,000 in bank debt plus a used Piper Seminole airplane, valued at $35,000 by Wade. McDougal took the plane, and Wade began making at least some payments on the debt. Citizens Bank, however, did not release either the McDougals or the Clintons from liability for the full amount of the loan.

In September of that year, Rosalee Wade, Chris’ wife, who handled bookkeeping at Ozarks Realty, forwarded the county property-tax bill for Whitewater to McDougal. The bill, however, was not paid, and on Nov. 14, the local paper included the Whitewater Development Co. on a list of delinquent taxpayers. People in Flippin knew Clinton was a partner in the enterprise, and soon they were gossiping that the Governor had not paid his taxes.

Soon after the story appeared, Jim and Susan were in McDougal’s office at Madison when Bill Clinton called. McDougal’s secretary put him on the speaker phone. The Governor sounded upset, wanting to know what was going on with Whitewater. Despite the venture’s worsening financial straits, Jim tried to reassure him: “I’ve got my plate full, and I know you do too,” he began. Clinton interrupted.

“My name is in the Marion County paper for overdue taxes!” Clinton complained. “You know that’s political suicide. Hillary is mad as hell. This cannot happen.”

Jim and Susan were taken aback. They were admittedly lax about such tax matters themselves, but they had an employee whose job was to make sure taxes on the developments got paid on time. But whatever the reason for the delinquency, in Clinton’s anger McDougal saw a glimmer of opportunity. Perhaps he could extricate the Clintons from the deal while still saving face. “Let’s just get you out of this,” McDougal suggested. Whitewater will “break even,” McDougal euphemistically said, but that was the best that could be hoped for. Bill and Hillary could simply sign over their interest to the McDougals, who would in turn assume the remaining liabilities and obligations.

“Fine with me,” Clinton replied, sounding relieved. McDougal said he’d do the paperwork. “Just run it by Hillary, would you?” Clinton asked.

Then and there, McDougal filled out a blank stock-transfer certificate and told Susan to take it over to Hillary so she could review and sign it. That afternoon, Susan dropped in at the Rose firm. She was in buoyant spirits, relieved that she and her husband could stop worrying about the Clintons. She sat down across from Hillary at her desk, thinking how she might brighten up the office if it was hers, as Hillary read the proposed transfer of ownership. “What is this?” Hillary demanded, her tone cold. Susan’s smile froze.

“It’s just a stock certificate,” Susan said. “Jim says you’re going to get out of Whitewater. Jim talked to Bill. I know you don’t want this to become a campaign issue. This is strictly for your and Bill’s protection. You and Bill just sign it.”

“No!” Hillary angrily interrupted. Looking intently at Susan, she rose and leaned over her desk. “Jim told me that this was going to pay for college for Chelsea. I still expect it to do that!”

Susan was stunned. Obviously Bill hadn’t told Hillary anything. She laughed nervously, trying to lighten the mood. “You have a problem? Well, O.K., no big deal.” Susan took back the paper, rose stiffly and went straight back to Jim’s office.

“There are problems,” she said ominously. “Bill didn’t tell Hillary.”

McDougal was beside himself. “All these years of our paying for them. We paid the bills, Bill blasted us over the property taxes, and now Hillary is annoyed with me?” He shrugged. “Well, f— them.”


IN 1986 THE MCDOUGALS’ FORTUNES TOOK A VERY BAD TURN. JIM and Susan separated. Then McDougal suffered a heart attack, he was found to be a manic-depressive, and he was forced to step down as chairman of Madison Guaranty after banking regulators declared it insolvent. As the S&L crisis spread, Hillary and the litigation team at Rose realized that good money could be made representing the regulators in lawsuits involving failed thrifts. Many Rose partners opposed the idea of suing former clients on behalf of Washington, but after a series of acrimonious meetings, Hillary’s view prevailed. But first Rose had to free itself of any potential conflicts, which meant ending its retainer with Madison. Hillary did so by writing a letter to McDougal and Latham in July 1986.

While on retainer to Madison, the Rose firm had taken on sporadic assignments. Probably the most significant was a 1985 purchase by Madison Financial of a large tract of land destined to become Madison’s Castle Grande real estate development. Among other amenities, Castle Grande was going to boast a microbrewery, prompting research by Rose into whether a brewery could operate in a dry township. But a bigger problem was that a regulation of the Arkansas savings and loan board prohibited Madison Financial from buying the entire Castle Grande tract because, as a subsidiary of Madison Guaranty, it could hold total investments of no more than 6% of Madison Guaranty’s assets. So Madison assigned the right to purchase part of the property to Seth Ward, Webster Hubbell’s father-in-law, for $1.15 million. Madison lent the entire purchase price to Ward, a loan for which Ward was not personally liable. McDougal also promised Ward that as lots from his land were sold and the proceeds used to repay the Madison loan, Ward would earn a 10% commission on the sales, whether or not he generated the sales. The Castle Grande acquisition and sales were described in a Federal Government report as “a series of flips and fictitious sales,” shams intended to disguise Madison Financial’s control of the parcel.

The Rose firm represented both Madison Guaranty and Seth Ward in these transactions, with Ward’s bills paid by Madison. According to Rose firm records, Hillary Clinton had 14 meetings or conversations about Castle Grande for which she apparently billed Madison, many of these with Seth Ward. The work apparently included drafting a $400,000 option agreement; one Rose bill says “telephone conference with Seth Ward regarding option” and “prepare option.”*[3]

Meanwhile, the Whitewater saga continued. The McDougals had used the Whitewater corporation as a vehicle to buy more property, and now wanted to use the Whitewater losses to shield profits from another land deal. McDougal also still wanted to extricate the Clintons from any Whitewater liabilities and thought the best way to do this was to have Bill and Hillary transfer their interest to him and Susan. Hillary again refused, insisting that it was pointless for them to give up their equity if she and Bill could not also extricate themselves from the original loan from Citizens Bank, which was now called 1st Ozark National Bank. (The Flippin bank had changed its name in 1985, when it was acquired by Twin City Bank in North Little Rock.) As McDougal saw it, if the Clintons got out of the now doomed investment, they could spare themselves political embarrassment. But if Hillary wanted to stay in, fine.

Enter Ron Proctor, a vice president of 1st Ozark National Bank. The Citizens Bank had been lax about requiring an annual financial statement from the Clintons; when state banking regulators occasionally asked about the lack of a statement, the bank’s officers would produce the McDougals’ statement and remind the regulators that Clinton was the Governor. But starting in late 1984, the bank began demanding a statement so that its records could be complete in time for the takeover by Twin City.

Proctor and McDougal exchanged letters about the Clinton statement, with Proctor threatening not to renew the loan and McDougal insisting that he had tried without success to meet with the Clintons. Finally, a financial statement for the Clintons was produced, signed Bill and Hillary Clinton in what appears to be Hillary’s handwriting. The statement, which may have been prepared by McDougal, lists “accounts, loans, notes receivables” of $100,000 and real estate of $100,000. If these figures refer only to Whitewater, then the statement values the Clintons’ half-interest in Whitewater at a ludicrously high $200,000.

In late 1986, two years later, when the bank loan was once again up for renewal, Susan called the Governor’s office and got Bill on the phone. “I’m just going to need current financials” for you and Hillary, she said. “Yeah, that sounds fine,” he replied, as though he were barely focusing on the matter. “Would you just run it by Hillary?”

Susan wasn’t eager to talk to Hillary, but she called her at the Rose firm, explaining again that she needed financial-disclosure statements. As soon as Hillary started talking, Susan could tell from her tone that this was going to be difficult. Instead of simply agreeing to provide the form, Hillary began, in Susan’s view, cross-examining her about Whitewater sales and income. Finally she said she wasn’t inclined to give Susan any financial statement. “This isn’t for me,” Susan said, almost beside herself, “it’s for the bank. The bank wants it.” She felt she was practically pleading with Hillary. But she didn’t want to say the obvious: that if she didn’t get the form the bank might call the loan, and she and Jim couldn’t pay. Susan felt so beaten down. How could Hillary have been her friend and be treating her this way?

Susan was so upset by Hillary’s recalcitrance that she called Charles James, the accountant who handled the Whitewater books and had handled the paperwork to incorporate Whitewater Development in the first place. Susan explained that Hillary was refusing to submit a financial statement, and she was desperate. “What can I do?” she asked. “This whole house of cards could come down.” James came over, sat down with Susan and wrote down the various payments from the McDougals and Clintons on a yellow legal pad. Of the almost $200,000 that the Whitewater partners had had to contribute to cover shortfalls in income from the development itself, the McDougals had contributed just over $158,000; the Clintons just under $36,000. Before performing this exercise, James and Susan hadn’t realized how large a discrepancy the payments reflected, and James was irate. “You tell her, by God, you’ve given all this money to this project and, by God, you want the statement!”

Thus armed, the next day Susan took the yellow pad, mustered her resolve and went to the Rose firm’s office without an appointment. “Can I see Hillary,” she said. Once ushered into Hillary’s office, she dropped her perky cheerleader facade. “Look at these numbers,” she said. “This is a list of our contributions, and this is a list of yours. I really don’t understand your attitude given these numbers. If you don’t give the bank the statement, they’re going to call the loan.” She still couldn’t bring herself to admit that in that event, she couldn’t pay it, and it would fall to the Clintons. She continued, “This is really important. We have nothing to worry about if you give me the statement.”

Hillary responded by saying she wanted to review the numbers Susan had provided. Exasperated, Susan left empty-handed.

By Dec. 3, 1986, the loan expiration date, nothing had been resolved. But the next time Susan spoke to Proctor, he mentioned that he “just wanted you to know” that he was dealing with Hillary on the matter, and that he was sure there would be “no problems.” In marked contrast to their earlier conversations, Proctor seemed to be falling all over himself to be nice, asking her how things were going and telling her not to worry about the Whitewater bank loan. Yet Proctor himself was evidently still trying to get the financial statement from the Clintons. Susan Sisk, the senior lender at Twin City at the time, recalls chatting with Wes Strange, 1st Ozark’s new president, who mentioned that Clinton had recently made a speech in the Flippin area. “I told Bill,” Strange reported to Sisk, “we still need the financial statement.”

“Well, I’m sure that whatever you need we’ll get for you,” he said Clinton replied. But no statement had been forthcoming.

Susan McDougal was aware that something was going on between Hillary, 1st Ozark, and officials at the parent, Twin City. One day Hillary called, asking Susan to get a copy of a Whitewater document and drop it off at the Twin City headquarters in North Little Rock, which Susan did. Then, soon after, Susan received a call from the Governor himself. “Would you mind,” he began, “Hillary wants to look at the documents” to support Susan and James’ calculations on the yellow pad. So Hillary didn’t trust her, Susan thought. Well, she’d be only too happy to give her the documents. She had more files than the bank. She was sick of the paperwork and the responsibility. Let Hillary take it on if she was suddenly so concerned that Susan might be cheating her. Susan put all the documents she had into a large box; her brother, state senator Bill Henley, dropped them off with a state trooper at the Governor’s mansion’s gatehouse.

Apparently the matter of the loan renewal was temporarily patched over with the bank, which agreed to take the land purchasers’ payments for the next six months. In a letter dated Dec. 16, 1986, McDougal informed Bill and Hillary that three land buyers had defaulted, “thereby creating a shortfall of about $1,000 a month for our monthly payment … We have negotiated an arrangement with the bank to accept the amount we are now receiving from customers as the monthly payment over the next six months. This will take us into the month of May 1987.” Susan was never aware of such an arrangement, nor did she know that Jim had spoken with the bank. Almost immediately after writing the letter, Jim moved to California.*[4]


NOT EVERYONE AT THE BANK IN FLIPPIN WAS COMFORTABLE ABOUT what was happening. Vernon Dewey, a loan officer at 1st Ozark, thought it was imprudent and that the bank should call the loan. He’d written the Clintons repeatedly asking, then demanding, that they provide a financial disclosure. He couldn’t understand why the Clintons wouldn’t provide it. Surely they understood that no matter what the statements showed, the bank was all but certain to renew the loan since he was the Governor. The Whitewater loan was the only one in the bank’s portfolio that had such irregular documentation. He insisted that the matter be brought to the bank’s directors, and argued that the loan should be called.

Dewey’s argument seemed to make the board nervous. Clinton was, after all, the Governor. Edward M. Penick, president of Twin City and ex-officio chairman of 1st Ozark, said he’d take up the matter personally. He knew Hillary somewhat; Hillary and the Rose firm had successfully represented Twin City in a complicated bond case. Penick drafted the letter and sent it to Hillary at the Rose firm.

Penick had a far more important matter pending with the state government: the extension of branch banking. Arkansas’ banking law, dating from Reconstruction, prohibited bank branches anywhere beyond the city limits of the city where the bank was incorporated; this was a populist measure designed to encourage and protect small, local banks and their communities and prevent statewide domination by the bigger banks in Little Rock. Branch banking was the single most important issue on the Twin City political agenda, because the bank was incorporated in North Little Rock. All it could do was gaze enviously at its rivals across the river in richer and more populous Little Rock.

For years Twin City had been trying to gain support for loosening the statute. The small-town banks always howled in protest, as did some of Twin City’s large rivals in Little Rock, which didn’t want to see increased competition there either. Politically, the measure seemed a long shot. Nonetheless, the bank had contributed generously to Clinton’s campaigns.

Twin City’s main link to the Clintons was Margaret Davenport, an executive vice president, a close friend of Hillary’s and a generous Clinton campaign contributor. Margaret was the bank’s principal line of communications to the Governor, through Hillary, and Penick had been relying on Davenport to press the branch-banking issue in her periodic lunches with the state’s first lady. Davenport had got to know Hillary when she first came to town in the late 1970s; they were among the few professional women in Little Rock at the time. As Governor, Clinton appointed her to the Commission for Arkansas’ Future and, more important, to the Arkansas Development Finance Authority Board, which provides long-term financing for businesses starting or expanding in Arkansas. While Twin City had rarely been a trustee for various bonds issued under the adfa, it was named the trustee for four bond issues in 1988 and 1989, which brought in some lucrative fee income. Twin City, in turn, steered at least some legal work to the Rose firm. So when the unresolved issue of the Whitewater loan again arose at a 1st Ozark board meeting, Penick said, “Margaret and Hillary are close friends, so I’ll have Margaret talk to Hillary about this.”

At about that time, Hillary did evidently speak to Margaret Davenport about the Whitewater loan. “Notes of TK w/M. Davenport,” handwritten notes on Hillary’s personal notepaper read. At the top right-hand corner is the date 1987. “56,623 balance. 2,303.78 Oct. 3.” On the side is an arrow, then “5 yr amortization. w/2 yr balloon. 1 2/3. Note secured by mortgage recorded Aug. 3, 1978 on 171 acres known as Whitewater Estates. Original $100,121 note.”

“TK” appears to be an abbreviation for “talk.” And, in fact, $56,623 was the precise amount of the 1st Ozark loan outstanding as of Oct. 3, 1986, and $2,303.78 was the interest then due on the Whitewater loan.*[5]

On Jan. 8, 1987, 1st Ozark’s loan committee considered, among other things, the Whitewater loan. Proctor reported on a visit he had made to Whitewater the previous month, which resulted in the bank’s valuing all of Whitewater at $104,000. The committee gave the loan a risk rating of 3, meaning the bank should start preparing for a default, but still hoped the loan would perform. The committee attached several conditions to approving the loan renewal, including obtaining the Clintons’ personal financial statement for the bank’s files.

In March, Hillary Clinton finally produced the long-awaited financial statement, submitting a Twin City Bank form. At the top of the statement is the admonition: “NOTE: Any willful misrepresentation could result in violation of Federal law.” The statement lists total assets of $290,000. The assets include cash and marketable securities of $170,000. Curiously, Whitewater is not mentioned by name as an asset. The statement lists $50,000 as “Real Estate Partial Interest” and $50,000 in “Loans Receivable.” It isn’t clear what assets these entries describe, but, presumably, they refer to Whitewater. The Clintons don’t appear to have owned any other real estate at that time, and the only “investment or holding” identified on Governor Clinton’s statement of financial interest, filed with the Arkansas secretary of state, is Whitewater. If the assets are meant to describe their interest in Whitewater, the value of $100,000 still seems grossly inflated.*[6]

Surely at this point, with all the records and information at Hillary’s disposal, it should have been obvious to the Clintons that a half-interest in Whitewater Development could not be worth anywhere near $100,000. And Ron Proctor or Wes Strange, the bank’s president, could have provided an accurate valuation, since they were in regular contact with Hillary at the time.

There’s no record the bank ever questioned the accuracy of the Clintons’ disclosure form. The legal obligation to be accurate lay with the Clintons, not the bank. Strange and Proctor were happy just to have the statement, thus satisfying the bank examiners. The Whitewater loan was renewed on March 26, 1987.

That winter, 1st Ozark wasn’t the only bank seeking the Clintons’ disclosure statement. Security Bank of Paragould, the lender of the money for the Hillary house, had also written Hillary asking her to “complete the enclosed financial statement” in order to extend the Paragould loan. Such a document in Security Bank’s files is signed by both Bill and Hillary Clinton. The form lists the same asset values as the one submitted to 1st Ozark, and carries the instruction, “Do not include assets of doubtful value.” The statement concludes with the admonition that “each undersigned represents and warrants that the information provided is true and complete.” (The Clintons’ lawyer, David Kendall, confirmed that the $100,000 in the financial statement refers to Whitewater. He offered no explanation for the asset values on the Clintons’ disclosure forms other than to say that land values in northern Arkansas rose in the late 1980s, adding that the Clintons had used “their best estimate.” Ron Proctor, citing instructions from the independent counsel, declined comment, as did Wes Strange.)

On April 1, 1987, just after the 1st Ozark Whitewater loan had finally been extended, the Arkansas legislature passed Act No. 539, which was the first chink in the state’s banking law. The Governor’s friend and state banking commissioner, Marlin Jackson, had at about the same time abandoned his opposition, throwing his support behind the new legislation. The statute, signed by Governor Clinton, provided for countywide branch banking in Arkansas counties with populations over 200,000.

There was no mention of Twin City by name in the legislation. But in fact, there was only one Arkansas county at the time with a population over 200,000: Pulaski County, which contains Little Rock and North Little Rock. And there was only one major bank chartered in North Little Rock: Twin City. The Little Rock banks had comparatively little to gain by expanding into lightly populated North Little Rock. Indeed, one of them, First Commercial, promptly sued Twin City, arguing that the new law was unconstitutional because it affected just one county. In practice, the statute benefited primarily one institution, and that was Twin City Bank.*[7]

In Flippin, most of the bank employees, including Vernon Dewey, were only dimly aware of the new legislation and its impact on their parent company. Dewey recalls, “I knew that Twin City was trying to get the Clintons’ support on getting into Little Rock. It was nixed, then it was approved after some calls were made. I don’t know the inner workings.” But he was still upset about the handling of the Clintons’ loan. The “higher-ups,” as he called them, didn’t have the guts to stand up to the Governor, and that offended him.


WHITEWATER WAS NOW PART of an era in Arkansas that both McDougals wanted to put behind them. They were only too happy to let Hillary take over day-to-day management, as she had done after successfully negotiating the 1987 loan renewal at 1st Ozark. When Hillary periodically needed the McDougals to sign something, they didn’t even respond; in various tax returns, Hillary signed for Whitewater, using the title “president.”

For a project that was yielding no profit, Whitewater was a constant headache. In the fall of 1987, Hilman Logan, the buyer of Lot 13, the site of the Hillary house, defaulted on his payments. Those payments were servicing the Clintons’ loan from Security Bank of Paragould, and Hillary had to find a way to keep that loan from being called. Chris Wade found another buyer. Hillary bought the lot back from Logan’s bankruptcy estate for $8,000, then resold it to Wade’s client for about $24,000. It seems remarkable that the lot was sold for $8,000 when the fair market value was obviously much higher.

Hillary was eager to use the proceeds to dispose of the debt she and Bill had taken on at Security Bank of Paragould to buy the house in the first place. As recently as April 4, 1988, Marlin Jackson had written Hillary enclosing a past-due notice on their note asking for accrued interest of $665 and either the principal or an extension agreement. Despite being a close friend and political ally of the Governor’s (though he had resigned as state banking commissioner), Jackson proved more of a stickler than had 1st Ozark. “Time is of the essence,” he wrote. Presumably, Hillary complied; a check for the interest dated April 11 was received by the bank.

While waiting for the closing on the sale of the house, Hillary again wrote the McDougals, trying to secure authority to act independently with respect to Whitewater. Evidently unaware that Jim had moved to California at the end of 1986, followed by Susan a year later, Hillary wrote to Jim on Nov. 28, 1988, at the address in Arkadelphia where he had been convalescing after his surgery. The letter went unanswered.

Toward the end of the year, the house sale closed, and in December Hillary used the proceeds to retire the Paragould loan. But her wish for Whitewater–to “get all that behind us by the end of the year,” as she put it in her letter–went unfulfilled.

In April 1988, 1st Ozark again contacted Hillary about renewing the Whitewater loan. Efforts to reach the McDougals in California had failed, and the bank had waived the requirement that the McDougals submit a financial-disclosure form, noting in a memo that the loan was “guaranteed by Bill Clinton.” But the bank set about getting the Clintons’ form, as well as a financial statement for Whitewater itself. In a letter dated April 12, 1988, Wes Strange wrote Hillary, “I have also enclosed a renewal note, hoping that you could help me in getting all the signatures on this and returning it as soon as possible. In addition, we will be needing an updated financial statement on the personal, as well as the corporation.”

After the previous year’s struggle to get a financial-disclosure form from the Clintons, it came as no surprise to Vernon Dewey that no updated statement was forthcoming. This year the bank appears to have simply given up. On July 13, Hillary signed and returned just the renewal note. “I am enclosing the renewal note you sent for Bill’s and my signature.” There is no mention of the financial statement, and none appears to have been submitted.

Two days later, 1st Ozark agreed to waive requiring the Clintons’ and Whitewater’s financial-disclosure forms, according to a document in 1st Ozark’s files, “Request for Loan Documentation Waiver,” dated July 15, 1988. Over the words approved by are the initials WS, evidently referring to Wes Strange. According to the document, reasons for the waiver were that the escrow account was making the payments, and the value of the collateral was “sufficient.” Still, waiving such a requirement was highly irregular, especially on a commercial loan, and Vernon Dewey felt it was imprudent to do so. For the first time, the bank now had no current financial-disclosure forms for any of the borrowers. This was the only loan in the bank lacking such documentation. As Strange told Dewey, the troublesome loan was just something they’d have to live with until it was, they hoped, paid off.

As these negotiations were under way, the Arkansas legislature was again considering the issue of countywide branch banking. Despite Twin City’s success the previous year, the statute hadn’t gone into effect owing to Twin City rival First Commercial Bank’s suit. But then a federal court ruling in Mississippi had authorized the Comptroller of the Currency in Washington to authorize branch banking despite restrictive state laws, prompting 22 Arkansas banks to seek approval for branches. With Margaret Davenport now handling the issue for Twin City, the bank remained keenly interested in passage of a law that would permit countywide branch banking throughout the state. Such a bill was passed in a special session of the legislature held in July, and was signed by Governor Clinton on July 15, the same day 1st Ozark waived the Clintons’ financial-disclosure requirement.

As Bill Clinton dreamed of a run for the presidency and his political star rose, that of his former mentor, Jim McDougal, continued its downward spiral. The medication prescribed for his manic depression seemed to be having no noticeable effect, and he was still subject to bouts of depression. His open-heart surgery had left him weakened, his eyesight impaired. The events of the past year, especially, seemed a blur. After his departure from Madison Guaranty, a banking regulator had turned over the results of its investigation to the Department of Justice, and the U.S. attorney in Little Rock, Charles Banks, launched a criminal investigation.

In October 1989, McDougal was indicted on 11 felony counts, including bank fraud, misapplication of bank funds, submitting false statements and conspiracy. The indictment zeroed in on just two allegedly sham transactions, both related to McDougal’s Castle Grande development, though not the parts Hillary Clinton and the Rose firm had worked on. After an eight-day trial, McDougal was acquitted of all charges. On June 7, 1990, the night of the verdict, McDougal got a call from the Governor. Hillary was on the extension. After congratulating him on the outcome of the trial, Bill turned the conversation to Whitewater. Though he seemed embarrassed to bring the matter up–he stumbled over the words–he mentioned that he and Hillary had recently incurred about $3,000 in out-of-pocket costs. McDougal was incredulous. “What do you want me to do now?” McDougal asked. Clinton indicated he and Hillary felt the McDougals should reimburse them. “Talk to Sam Heuer,” McDougal replied. “I’m too worn out.”

Two days later, Clinton did talk to Heuer, McDougal’s lawyer, but this time he said he and Hillary just wanted out of Whitewater. “Just get with Hillary,” he told McDougal’s lawyer. Heuer sent a letter to Hillary:

“I have talked to both Jim McDougal and Governor Clinton concerning [Whitewater Development Co.] … It is my understanding that all of the books have been delivered to Governor Clinton or his c.p.a. concerning this corporation … My suggestion would be to simply dissolve this corporation, and we would obtain a release of personal liability from the Bank in this regard. Let me know your thoughts …”

But once again Hillary kept them in the investment. She told Heuer she didn’t know the financial condition of Whitewater, and would check and call him back. But she never did.


IN EARLY 1992, AS CLINTON ENDURED A BRUISING PRIMARY campaign for the White House, Whitewater came back to haunt Bill and Hillary. Jeff Gerth of the New York Times began poking around Arkansas, interviewing McDougal and others about Madison and Whitewater. Hillary called her good friend New York lawyer Susan Thomases. She told Thomases that a reporter had stumbled onto a “stupid” investment she and Bill had made, and that the whole deal made her furious, especially at her husband. He’d got them into it, she said; McDougal was his friend. “I don’t want everyone digging into our personal records,” Hillary complained. She retained Thomases to look into the deal and handle reporters’ questions. Around the same time, Hillary also made another call, this one to Susan McDougal, in order to get her to sign over control of the property.

Susan herself had been enthusiastically supporting Clinton, dropping his name now that he was the Democratic front runner. One evening, before Gerth’s New York Times story about the investment appeared in early March, the phone rang, and it was Hillary. Susan could hardly believe it–in all their dealings, it was the first time she could remember Hillary calling her rather than her husband. Susan was excited; she put behind her the ill will that had developed between them. “I’m so proud of you!” Susan exclaimed. “You’re running for President. You’ve made all of Arkansas proud.” Hillary too seemed friendly, then mentioned, “I’m going to send you a power of attorney to sign.”

“Oh, fine,” Susan replied, trying to be agreeable. The power of attorney arrived, but Susan, her mind now on other things, didn’t get around to signing it. Then she got another call.

“I have not got it back.” It was Hillary again, this time her voice stern. Susan had left the letter with some friends. She called one, told her to sign her name for her, and drop it in the mail. She just wanted to get it out of the way.

The next day Susan heard from Jim, reporting that he too had received a call from Hillary demanding a power of attorney. “I don’t think I will do that,” Jim mused.

“I wish you’d called yesterday,” Susan said. “I just sent mine back.”

“You stupid, childish, naive fool!” Jim raged at her. “Honey,” she said, “these are people we know, they’re our friends. Why are you so upset?”

“Don’t you understand?” McDougal asked. He explained he wanted the Clintons out of Whitewater. It was just a shell, but he was planning to do some real estate development and he needed a vehicle. Whitewater, he said, had a track record; it had good credit; it had tax losses to shelter any future profits. Susan felt sorry for him, realizing how much he needed this. Then she mentioned that she hadn’t actually signed the power of attorney herself; a friend had. Jim’s spirits soared. “Call Hillary and void it,” he said.

Susan called the Governor’s mansion in Little Rock and asked for Bill, leaving her name. Late the next evening, Hillary returned the call. Susan said she was rescinding her power of attorney, and said she didn’t understand why Hillary and Bill didn’t just sign over their interests to Jim. There was nothing left of any value.

Hillary was angry at the suggestion. “We own half of it, and we are not getting out of it,” Hillary retorted. “It’s incredible that partners would be asked to sign over their stock.”

Now Susan was angry. “This was Jim McDougal’s project, his idea, his money!” She couldn’t believe Hillary was insisting on retaining half of an empty corporation. “Don’t you understand that I don’t want anything? It’s all going to Jim. It’s morally wrong for you not to give it to him.” Susan felt herself near tears. “You’re terrible people, after all he would and did do for you, that you wouldn’t do this.”

“I will not be blackmailed,” Hillary responded. “You can’t force us by making some threat.”

Suddenly Susan felt frightened. Why was Hillary using the word blackmail? Was someone else there on Hillary’s end of the line? Or worse, was the conversation being taped? Susan ended the conversation.

Shaken, she immediately called Jim. “For what it’s worth, I did everything I could” to get the Clintons to turn over their interest in Whitewater, she said. “They should do it. But I believe they were taping the conversation or someone was listening in. She used the word blackmail.”

Jim commiserated with Susan. This wasn’t Little Rock anymore. Bill and Hillary were headed to the White House.*[8]


WHEN THE NEW YORK TIMES STORY APPEARED ON MARCh 8, Thomases was happy: she thought it was incomprehensible. Nonetheless, at the request of Hillary and Thomases, Jim Blair was dispatched to talk with McDougal. The conversation did not go well: McDougal, broke and living in Arkadelphia, blew up when Blair suggested he had profited from Whitewater at the expense of the Clintons. He threatened to tell reporters about Clinton’s 1984 visit to his office to solicit business for Hillary’s law firm.

Blair backed off and eventually persuaded Chris Wade, who had taken on a portion of Whitewater’s debt in exchange for all the unsold parcels, to borrow $9,628 to retire the original 1978 loan taken out by the Clintons and the McDougals. Blair instructed Wade not to make the payment too quickly, lest it attract attention. Wade paid off the troublesome loan on May 12, 1992.

Whitewater soon died away as a campaign issue, and on Nov. 3, 1992, Bill Clinton was elected President. Though the Clintons were no longer liable for the Whitewater loan, they still were listed as co-owners of the Whitewater Development Co. Blair advised Bill and Hillary that they should untangle themselves from the McDougals for good, so he called McDougal’s lawyer, Sam Heuer, and told him the Clintons were willing to relinquish their interest in Whitewater, but it had to be done before the Inauguration.

When McDougal got to Sam Heuer’s office in Little Rock, Vince Foster was waiting for him. He had replaced Blair, whose plane had been fogged in. Foster had no official role in the campaign, but he was handling some personal legal matters for Bill and Hillary, and Blair had enlisted him for the “paperwork,” as he put it, regarding Whitewater. Essentially, the agreement proposed by Foster called for McDougal to buy the Clintons’ interest in Whitewater for $1,000 and release them from any further claims or liability. McDougal was upset that the Clintons wanted to make him liable for the accuracy of various representations when they had all the records. “Vince, would you let your clients sign these?” McDougal asked. Foster replied, “Jim, I’m just the messenger.”

So Heuer got Blair on the speakerphone to take over the negotiations. McDougal was contemptuous of Foster, whom he perceived as nothing but a lackey for Blair. McDougal enjoyed the negotiations. He felt he won on virtually every contested point. The Clintons were desperate to get out of Whitewater before the Inauguration, and the leverage had shifted to him. Blair agreed that the Clintons would prepare and file the tax returns within 90 days, a task that was assigned to Foster. Blair also agreed that the Clintons would return the Whitewater corporate records. Although the documents acknowledge receipt of the $1,000 purchase price, McDougal didn’t even pay it. Blair did, in what he says was a “loan” to McDougal. But McDougal never reimbursed him.

McDougal and Foster, on behalf of the Clintons, signed the papers. After 14 years, the partnership was finally over, and Jim McDougal was the sole owner of Whitewater Development Co. On Jan. 20, 1993, Bill Clinton was inaugurated as the 42nd President of the United States.


*[1] Clinton has denied visiting McDougal and asking that he send business to the Rose firm to help Hillary. But it seems almost certain that some such visit did take place. McDougal insists he was solicited by the Governor, and Henley, who was present outside the office during the visit, remembers the incident and McDougal’s remark when Clinton left.

*[2] Hillary disputes this account of why she went to visit McDougal.

*[3] Hillary Clinton has strenuously denied wrongdoing and has done everything possible to distance herself from Castle Grande.

*[4] Citing his medical condition at the time, McDougal says he has no memory of any negotiations with the bank or writing such a memo to Hillary. Nor, he says, was he aware that Hillary was talking to anyone at the bank at the same time about an extension of the loan. Ron Proctor, the only person who appears to have been talking to Susan, Jim and Hillary about the matter, says he has been instructed by independent counsel Kenneth W. Starr to remain silent.

*[5] Margaret Davenport Eldridge said she doesn’t recall discussing either Whitewater or the branch-banking issue with Hillary Clinton, nor does she recall Ed Penick’s asking her to discuss the issue. Asked about Hillary’s notes, Eldridge said that Hillary might have called her for information about the 1st Ozark loan, but she doesn’t recall any such conversation.

*[6] Even if the 24 unsold Whitewater lots hadn’t already been conveyed to Chris Wade’s Ozark Air, a half-interest would be worth only $52,000. But those lots had been sold, and Wade had since reduced his obligation to repay $35,000 of the 1st Ozark mortgage by making payments of about $10,000. Thus the Clintons’ and McDougals’ half-interests of what remained in Whitewater Development would be valued at $30,000 (half the value of the contracts receivable) plus half the value of Wade’s obligation to repay $25,500 of the 1st Ozark mortgage, or about $12,750. That would bring the total value of the Clintons’ interest to about $42,750.

*[7] Jackson says Clinton never pressured him to change his mind.

*[8] The timing of these conversations is disputed by Hillary Clinton. David Kendall said they must have occurred when Hillary sought a power of attorney in 1988. Susan McDougal insists they occurred during the campaign.

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