
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, January 10, 1994                   TAG: 9401100107
SECTION: NATL/INTL                    PAGE: A-1   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                LENGTH: Medium

ARK. S&L REPORTS DISAGREED

Nine months after a law firm in which Hillary Rodham Clinton was a partner told state regulators a troubled Arkansas thrift was heading for improvement, federal regulators painted a starkly different picture - warning that the institution was teetering near insolvency because of risky land ventures and accounting irregularities, documents show.

A lawyer at the firm who signed much of the correspondence said Sunday that it was simply passing along the thrift's own assessment.

A 1986 audit by the Federal Home Loan Bank Board also warned that Madison Guaranty Savings and Loan funds appeared to have been improperly diverted to projects and associates of the thrift's owner, James McDougal.

Eight years later, that allegation is a key focus of a widening federal probe into the thrift's failure that has now embroiled President and Hillary Rodham Clinton.

Investigators are trying to determine whether the S&L's funds were used in the mid-1980s to pay the president's political debts, and whether Madison deposits were diverted to other entities McDougal controlled, including Whitewater Development Corp., a real estate partnership he and his then-wife formed with the Clintons.

The Clintons have said there was nothing improper in their business dealings. And in an interview Friday, McDougal supported their position, saying the Clintons "in no way benefited" from his activities.

The 1986 audit never mentions the Clintons or Whitewater. But it portrays Madison as financially reckless, rife with conflicts and on the brink of collapse. The tone of the report contrasts with the more reserved, sometimes optimistic assessment the Rose Law Firm had given state regulators a few months earlier.

Hillary Rodham Clinton, through her firm, had been placed on a $2,000-a-month retainer by McDougal and was working to get the state to approve a novel stock issue plan to help recapitalize the thrift. She wrote a letter to convince state regulators the plan was legal.

Correspondence in the matter suggests her role was limited, with most of the firm's work done by Rose associate Richard N. Massey.

The letters show the firm was aware in 1985 that Madison did not meet federally mandated cash reserve rules. But in a 1985 letter to a state regulator, Massey suggested improvements were expected.

by CNB