SLIPS ON THE PAPER TRAIL

By Richard Stengel

SHE HAS A HEARTWARMING BOOK coming out about children. She recently described herself as a "Christmas fanatic'' and celebrated the holiday by wearing red earrings in the shape of ribbons. Even her shoulder-length flip has a more traditional look.

But just when the First Lady was preparing to return to the political stage after a year quietly refashioning her image into a combination of Martha Stewart and Mother Teresa, Hillary Rodham Clinton now faces a crisis that even the most artful public relations may not be able to fix. Within the space of 48 hours last week, the sudden discovery of controversial records has cast new light on her role in two controversies: the purge of the White House Travel Office in 1993 and her work at the Rose Law Firm in Little Rock for Madison Guaranty, the Whitewater savings and loan that lost $60 million of taxpayers' money.

Seemingly out of nowhere, the White House last week released a previously unknown 1993 memo by former administrative aide David Watkins in which he said he fired the travel office staff at the "insistence" of Hillary Clinton. "She conveyed to me in clear terms," Watkins wrote, "...her desire for swift and clear action to resolve the situation." The memo, which Watkins apparently never sent to anyone, contradicts the First Lady's assertions that she had nothing to do with the mass firing.

Then two days later, the White House disclosed that a personal aide to the Clintons had stumbled upon 115 pages of billing records from Mrs. Clinton's Rose Law Firm that had been eagerly sought for more than two years by congressional investigators as well as by the Whitewater investigators. Carolyn Huber, who was the custodian of the Clintons' personal files taken from White House lawyer Vincent Foster's office after his 1993 suicide, discovered the copied billings while sorting through correspondence in her East Wing office.

Mrs. Clinton has long maintained that her billings on behalf of the bank were "minimal." The newly discovered billings, which contain handwritten notations by both Mrs. Clinton and Foster, show that Mrs. Clinton performed about 50 hours of work for Madison over a 15-month period. The papers also make clear that she made some 68 phone calls concerning Madison and engaged in two official contacts with Arkansas state officials on the bank's behalf. Mrs. Clinton's personal lawyer, David Kendall, asserts that the papers merely confirm that his client did not perform significant work for Madison.

The records also reveal that Mrs. Clinton had at least 14 meetings on what regulators have described as a fictitious property deal called Castle Grande. Mrs. Clinton has told RTC investigators that she does not recall working on the transaction. According to the billings, Mrs. Clinton met repeatedly with Seth Ward, the father-in-law of Webster Hubbell, former Associate Attorney General now serving time in federal prison for bilking the Rose Law Firm. Ward, say investigators, was a sham purchaser of the 1,000-plus-acre plot south of Little Rock because the only security Madison required for the loan was the land itself. A computer printout among the billings reveals that Mrs. Clinton drafted an option agreement for Ward to sell part of the project back to Madison for $400,000.

Republican Senator Alfonse D'Amato, whose Banking Committee is investigating Whitewater, said last week's revelations suggested a cover-up: "We have a difficult time believing that this was not a deliberate withholding," he said. "There is clearly a pattern of deception that is disturbing and troubling.'' Moreover, a counsel for the committee has suggested that the "disappearance" of these records raises the possibility of obstruction of justice.

Mrs. Clinton has stated that the lion's share of the work on Madison was done by a "bright young associate" named Richard Massey. Mrs. Clinton has also implied in a sworn statement to the RTC in May 1995 that Massey brought Madison's business to the firm. Committee sources tell TIME that Massey will testify this week, that he did not bring Madison in as a client and that he assumed Mrs. Clinton was involved.

Meanwhile, the White House provided the Senate Banking Committee last week with a glimpse of privileged documents, including a photocopy of a Dec. 20, 1993, New York Times editorial with curious presidential marginalia. The editorial, which chastises Clinton for not cooperating with the Whitewater investigation, mentions Beverly Bassett Schaefer, whom then Governor Clinton appointed to the agency that oversees savings and loan associations in Arkansas. According to committee sources, the President drew an arrow from Schaefer's name and scrawled, in a reference to his 1992 campaign, "This is important to be on top of. Bassett did a good job in camp. on this--can she now?" Mark Fabiani, an associate White House counsel, argues that Clinton's note simply reflects his hope that she would continue to express the view that state regulators had moved aggressively to close Madison down.

All of these questions come at an awkward time for the Clintons. The President was said to be so distracted by the disclosure of the Watkins memo Wednesday night that his mind wandered during the budget talks. As for his wife, the revelations are likely to make it harder for her to take a larger public political role anytime soon.

--Reported by James Carney and Viveca Novak/Washington

COLOR PHOTO: NINA BERMAN--SIPA FOR TIME CONTRADICTION: D'Amato, right, calls the revelations about the First Lady's legal work "troubling" [Hillary Clinton]

COLOR PHOTO: MIKE THIELER--REUTERS [See caption above--Alfonse D'Amato]

With reporting by JAMES CARNEY AND VIVECA NOVAK/WASHINGTON