The Tangled Web

By GEORGE J. CHURCH

If there is anything Bill Clinton does not need, it is another embarrassing question about Whitewater. In fact the President has agreed, most reluctantly, to the appointment of a special counsel to investigate that mess largely to move the questions off the front pages and TV network news for a while. But now TIME has turned up evidence that Bill and Hillary Rodham Clinton participated in deals in which the same land was sold and resold -- in one case to themselves -- at rapidly escalating prices for reasons that cannot quickly be pinned down.

Even in the middle of what should have been a heady European trip, a senior aide reported Clinton to be "vexed" and "frustrated." In Brussels, Prague, Kiev and Moscow he was winning favorable press coverage for his handling of foreign policy. But at every stop he kept hearing that awful word Whitewater to his obvious dismay. Presidential aides had fought to portray criticisms of Whitewater and related deals as partisan Republican sniping. But now nine Democratic Senators had joined the clamor for a special counsel to take an independent look.

A conference call Tuesday night between Clinton's entourage in Prague and people at the White House ended with no final decision. But before leaving the Czech capital Wednesday morning, Clinton told advisers, "I want to get on with the business of my presidency," and gave the go-ahead for a special counsel. Officially, the decision came in a letter from White House counsel Bernard Nussbaum to Attorney General Janet Reno.

That gave White House aides a reason to turn aside any new Whitewater questions: from now on, it's all up to the special counsel. But there are questions about the special counsel. Who will be chosen? Reno's only answer was someone "ruggedly independent." Outsiders could agree only on a general description: the counsel should be someone well known and respected, at least within the legal profession; probably retired or semi-retired (because he or she could not be involved in any active litigation); and preferably a Republican. How broad or narrow will the probe be? Said Justice Department spokesman Carl Stern: "We're not going to tell the special counsel what to investigate. He or she is going to tell us."

The difference could be crucial. An inquiry focused narrowly on Whitewater and the failed Madison Guaranty Savings & Loan, whose owner James McDougal and then wife Susan were partners with the Clintons in that land venture, might be concluded speedily, but be open to charges of inadequacy. A broader investigation could turn into a fishing expedition lasting for years.

In any case, matters meriting a special counsel's attention keep piling up. The fundamental questions still are: Was any money from Madison Guaranty improperly funneled into Governor Clinton's campaigns, or into the Clintons' pockets? And did the Governor repay with political favors to the S&L? But any attempt to answer quickly leads into a tangled financial-political underbrush, which seems to get thornier every day. Some new problems:

RUNAWAY INFLATION? On July 14, 1978, Arkla Land Co. sold a 3,600-acre tract in northern Arkansas to a company called 101 River Development Inc. for a price equivalent to about $400 an acre. On Aug. 2, a 230-acre parcel was resold. The buyers: Bill and Hillary Clinton and James and Susan McDougal. A deed examined by TIME in the Marion County seat of Yellville is recorded in their individual names; tax stamps indicate the price was $203,000, or roughly $882 an acre -- more than double the per-acre price only 19 days earlier. Little more than a year later, on Sept. 30, 1979, the Clintons and McDougals sold the land again, to their newly formed Whitewater Development Corp. The price, again as calculated from tax stamps: $250,000, or just under $1,087 an acre.

Why the rapid price inflation? Why did the Clintons and the McDougals pay twice the price paid by 101 River? Why was the price increased almost 25% a year later? The only explanation available, and a not fully satisfying one, comes from James Patterson Jr., who was involved in several ways: he was secretary of 101 River Development, which sold the land to the Clintons and McDougals, and also president of Citizens Bank and Trust in the tiny Arkansas town of Flippin, which loaned money to 101 to buy the land and later advanced a $182,611 mortgage loan to Whitewater so it could repurchase the same land. Patterson, in an interview with TIME, insists that the sale to the McDougals and Clintons was an arm's length transaction. The reason they paid more per acre than other buyers of acreage from the large parcel was that they bought better land with a large amount of river frontage. And the reason his bank extended such loans, Patterson said, was to boost local economic development.

PROFIT OR LOSS? The Clintons have contended that rather than improperly profiting from their half-share in Whitewater, they lost nearly all the $69,000 they invested. But that claim is becoming increasingly difficult to support. For one thing, Whitewater's purchase of the land for $47,000 more than the Clintons and McDougals had paid for it would have yielded each couple an initial profit of $23,500, if they had a fifty-fifty share in everything. The profit may have been entirely on paper; even so, they should have paid federal capital-gains taxes on it. The Clintons' tax returns from 1980 through 1987 show no such payment; their 1979 return is unavailable.

Besides the $183,000 loan from Citizens Bank, Whitewater was started with a down payment of $20,000. But documents establish that the $20,000 was also borrowed, from Union Bank of Little Rock. That raises the question of whether the loan from Citizens was prudent, given that there was no cash down payment. Also, it is not known for sure how much, if any, unborrowed cash the Clintons put into Whitewater.

Further, records and interviews with Chris Wade, the real estate agent who sold the lots for the Clintons and McDougals and ended up buying much of the , land from them, indicate that Whitewater over the years took in around $270,250. Wade claims that Whitewater spent $40,000 on improvements like roads, and carrying costs on the land may have eaten up much of the rest. But it is hard to see how the Clintons' half-share could have resulted in a loss of anything like $69,000. McDougal has told the Associated Press that he thought their cash investment, and loss, was only about $9,000 up to 1986.

CONFLICT OF INTEREST? A Governor going into partnership with a man whose main business is regulated by the state government seems questionable to begin with -- or at least an occasion for special vigilance. But at least one more specific potential conflict has been turned up by TIME. In 1983, Madison Guaranty sought state approval, over the objections of a rival S&L, to open a branch in Salina County. A six-member board established to decide such cases had a temporary vacancy. Governor Clinton sent a letter to one Dick Fisch (nobody today recalls anything about him) appointing Fisch a "special member . . . to specifically hear" the Madison case. The board, including Fisch, voted to approve Madison's application. As it turned out, the branch never opened. No matter; in the view of some lawyers, it was unethical for Clinton to decide who should vote on an application from a business partner of the Governor's.

TRYING TO MISLEAD REGULATORS? Rose Law Firm, in which Hillary Clinton was a partner, represented Madison Guaranty for a retainer of $2,000 a month, and in 1985 Mrs. Clinton presented to a regulator appointed by her husband a plan for a sale of preferred stock to shore up the S&L's finances. In support of that petition, Richard Massey, another member of the Rose firm, wrote two letters. One, in June, acknowledged inferentially that Madison did not meet federally mandated cash requirements but cheerily asserted that "the applicant anticipates that no deficiency will exist in the near future." The next month Massey advised that Madison "anticipates . . . improvement of its financial condition and services provided to customers." Massey told the Associated Press that he was merely passing on what he was told by Madison management.

Those rosy opinions were sandwiched between totally contrasting judgments by the Federal Home Loan Bank Board, which supervised S&Ls whose deposits were insured by the Federal Government, as Madison's were. In a 1984 audit, the bank board warned that Madison's "investment and lending practices in real ( estate developments" were jeopardizing its "viability." In 1986, eight months after the second Massey letter, another bank-board audit cited a hair- raising list of "problems," including "conflicts of interest, high-risk land developments, poor asset quality . . . inadequate income and net worth, low liquidity, securities speculation, excessive compensation ((presumably to officers)) and poor records and controls." All that, said the bank board, raised "a significant threat to ((Madison's)) continued existence."

The federal forebodings proved prescient: Madison did fail, and was taken over by federal regulators on March 2, 1989. A few days before, Vincent Foster, then a partner in Rose Law Firm, wrote to the Federal Deposit Insurance Corporation, which had temporarily taken responsibility for dealing with failed thrifts, seeking a contract for Rose to represent the regulators. Rose in fact got the business, and Webster Hubbell, a partner who has since become Associated U.S. Attorney General, brought a $6 million suit on behalf of the regulators against Madison's accountants; he settled for $1 million.

The question is whether anyone told the FDIC that Rose had previously represented Madison. Under federal law, it could be a crime not to disclose this fact. Foster's letter made no mention of it, and he cannot shed any light on the matter now: he became a White House counsel after Clinton's victory but committed suicide in July (after his death, a Whitewater file was removed from his office, and the disclosure of that helped trigger the whole scandal). According to government documents, a Rose lawyer recalls telling the FDIC. Officials of that agency say they can find no records nor anyone with a memory of being orally informed.

Obviously, no one can predict the outcome of the special counsel's probe. The dealings in question are so complex that it is difficult even to summarize the suspicions they arouse, let alone cite the evidence supporting such suspicions. The sums of money involved are relatively petty, certainly on the scale of those Clinton now grapples with in shaping a federal budget. Violations of law, if any, would be extremely difficult to prove. Even Iowa Congressman Jim Leach, the chief Republican gadfly on Whitewater, doubts that the special counsel can or should bring criminal charges against Bill or Hillary Clinton. At most, he thinks, they might be assessed some civil penalties, perhaps mostly "symbolic" ones. But on another level, the investigation concerns the much larger issue of whether a President and First Lady can be trusted to obey the law and tell the truth.

With reporting by James Carney with Clinton, Richard Behar/Little Rock, Elaine Shannon/Washington and Suneel Ratan/Yellville