JEAN LEWIS’S OCTOBER SURPRISE
ALTHOUGH SHEFFIELD NELSON found Larry Nichols useful in promoting the sex angle against Clinton, it was Nelson himself, a savvy executive, the sex angle against Clinton, it was Nelson himself, a savvy executive, who pried open the Clintons’ personal finances. Rather than the Star, his preferred forum for this more tasteful and complex story was the nation’s single most important newspaper, the New York Times. In this project he enlisted the couple’s embittered former business partner, James McDougal, and a Times reporter he had known for several years. Whether by design or not, their timing was excellent. Investigative reporter Jeff Gerth’s initial Whitewater story appeared on the Times’s front page on Sunday, March 8, 1992—two days before the “Super Tuesday” primaries in six southern states and just weeks before the crucial Democratic contests in New York and California.
“What mighty contests,” wrote Alexander Pope, “rise from trivial things.” The Whitewater property was not vast: it spread across roughly 230 wooded acres, at the confluence of two of the best fishing streams in the Ozarks—Crooked Creek and the White River. The sums involved were also comparatively small. In buying the property back in 1978, the Clintons and McDougals together had put a bit more than $200,000 in borrowed money at risk. Had the project succeeded as planned, each couple hoped to realize a profit of roughly $45,000. As it happened, the Clintons ended up losing a bit less than that, the McDougals somewhat more—although Jim McDougal’s habit of commingling funds among his many real estate entities would make a precise accounting impossible. Even the washboard gravel roads bulldozed and graded by the Whitewater Development Corporation remained unpaved fourteen years after
Bill Clinton was first elected governor. Far from trivial, however, was the depth of McDougal’s resentment toward the Clintons.
In time, McDougal would portray his former partners as a coolly cynical couple, “takers rather than givers … unwilling to jeopardize their political position for the sake of friends.” Hadn’t they turned their backs on him after the catastrophic events of the eighties—when McDougal had ruined his marriage; suffered a stroke and succumbed to manic-depressive illness; lost a bank he had bought as well as his insolvent thrift, Madison Guaranty Savings and Loan; forfeited his overleveraged, ramshackle real estate empire; and finally found himself facing a four-count federal bank fraud indictment in 1990? Undoubtedly they had. But he had given them plenty of good reasons for shunning him, not the least of which was his inept and self-serving management of Whitewater itself.
McDougal’s colorful and increasingly erratic career—as old-time agrarian populist, campaign organizer, failed politician, college professor, real estate developer, banker, entrepreneur, promoter, salesman, savings and loan mogul, recovering alcoholic, mental patient, criminal defendant, raconteur, and sometime confidence man—had made him a familiar if rather untrustworthy figure to many Arkansas journalists. A largely self-educated country boy from Woodruff County, McDougal had grown up on the geological and historical boundary between the Arkansas cultures of hill country and Delta. He could recite Bible verses and quote lengthy passages from Shakespeare and James Madison from memory.
After a well-publicized trial, McDougal had been acquitted of the original fraud charges in Little Rock’s federal district court. At the time, he had blamed the bias of Bush administration Republican prosecutors for his plight, but few observers took that charge seriously. Reporters who covered the trial attributed the verdict to a poorly organized prosecution and the spellbinding effect of McDougal’s own testimony on the jury.
Sick, bankrupt, and living on Social Security disability payments in a borrowed mobile home on somebody else’s land near the little town of Arkadelphia, McDougal had then petitioned the governor’s office for a job. Wary Clinton aides made an inquiry to Arkansas securities commissioner Beverly Bassett Schaffer, a Clinton appointee who had quietly urged the FBI to investigate him in the first place. No way, Bassett Schaffer told them. In her view, McDougal was no innocent victim of the national savings and loan meltdown, but a reckless and devious man who should not be trusted.
This rejection maddened the desperate McDougal. Oddly, however, it was a grudge against Clinton’s Democratic rival Jim Guy Tucker, more than his brewing feud with Clinton, that first prompted McDougal to seek out Sheffield Nelson in 1992. Like Nelson, Tucker also had lost a bruising political race to Clinton. A handsome Harvard-educated ex-marine and former prosecutor,
Tucker had given up a seat in Congress to challenge Clinton for the governorship in 1982. He had emerged from the Democratic primary a loser, deeply in debt and feeling angry.
Nelson, Tucker, and Clinton had been mutually antagonistic for years, but McDougal had entered into separate business dealings with all three during the real estate boom of the late seventies and early eighties. Only Nelson had profited from his dealings with McDougal, and then only by threatening lawsuit against Madison Guaranty Savings and Loan—which made it all the more strange that McDougal came to him seeking revenge against Tucker and Clinton.
Another irony was that Madison Guaranty’s collapse had been triggered not by Whitewater, but by the failure of a major resort development on Campobello Island in New Brunswick, Canada, according to bank examiners. McDougal’s chief investors in that doomed $3.73 million enterprise happened to be Sheffield Nelson and Nelson’s friend Jerry Jones, the oil-and-gas magnate and Dallas Cowboys owner. It had been the nostalgic McDougal’s conceit that wealthy New England vacationers and retirees would be moved by memories of Franklin Delano Roosevelt’s summer retreat (location of the 1960 film Sunrise at Campobello, starring Ralph Bellamy as FDR) to purchase lots on the cold, foggy island north of Maine.
Unlike Whitewater, which placed none of Madison Guaranty’s assets at risk, Campobello Properties Ventures was mentioned repeatedly in Madison audits as a costly boondoggle. Eventually the U.S. Treasury Department, which inherited the property after Madison went under, entered negotiations to sell it to the Canadian government for use as a national park. Nelson and Jones had invested a reported $225,000 each to purchase a 12.5 percent share in the enterprise. In 1988, the Federal Home Loan Bank Board (FHLBB), then supervising Madison Guaranty’s assets, had bought their share for $725,000—a profit of $275,000.
“I can’t believe it. It’s an extraordinary event. It smells,” said William Seidman, who supervised the savings and loan bailout for the Bush administration, to the Fort Worth Star-Telegram. “It could be legit, but I doubt it.”
Jim Guy Tucker’s ties to McDougal were similarly extensive. At one time, the two men had shared ownership of a small bank in tiny Kingston, Arkansas. Although Tucker had grown wealthy investing in cable TV properties after his 1982 election defeat, his real estate dealings with McDougal had ended in mutual recrimination. Not long before McDougal’s 1990 trial, Tucker learned that McDougal had collected loan payments from buyers on a parcel the two had subdivided, but had failed to pay off the bank debt. McDougal nevertheless sent worthless deeds to their customers, bearing Tucker’s forged signature. Tucker had had no choice but to make restitution. But when McDougal subsequently
asked him to serve as a character witness, Tucker did have a choice and said no. Despite his acquittal, McDougal never forgave Tucker.
McDougal’s ostensible purpose when he contacted Nelson in February 1992 was to find a Republican lawyer willing to sue Tucker. McDougal wanted Tucker to return $59,000 worth of promissory notes which Tucker had, in fact, bought from him some years earlier, but which McDougal claimed he had stolen. After Tucker was elected lieutenant governor of Arkansas in 1990, putting him in line to succeed Bill Clinton, McDougal may have imagined that he would settle rather than risk bad publicity. In the end, no lawsuit was filed.
None of this complicated history was reflected in the Times’s Whitewater reporting, which also omitted any mention of Nelson’s role. Exactly how Whitewater came to bear the imprimatur of the newspaper of record always remained murky. Early on, Gerth said he had noticed a reference to the project in Clinton’s state financial disclosure forms, and telephoned the only Arkansan he knew for an explanation. Times editors insisted that Nelson had supplied nothing more than McDougal’s phone number.
Nelson, however, always proudly took full credit for putting the Times onto Whitewater. In his posthumously published memoir, Arkansas Mischief, McDougal confirmed that boast. “It was Nelson who passed the information on to Jeff Gerth,” he wrote. “Nelson was gleeful. He wanted me to talk with Gerth, the New York Times reporter who had written a long investigative article about the Stephenses’ extensive connections in Arkansas a few years earlier.”
On two previous occasions, Sheffield Nelson and Stephens, Inc., had each used the Times as a weapon in their ongoing feud. Gerth’s 1978 story about allegedly predatory natural gas pricing in Fort Smith was credited by Arkansas political observers with influencing enough votes to knock Witt and Jack Stephens’s nephew out of a three-way Senate primary race. Several years later, Stephens, Inc., had retaliated by talking to Times reporter Wendell Rawls, Jr., who wrote a critical examination of the Arkla-Arkoma deal, which indirectly helped Clinton put an end to Nelson’s political career.
After Nelson made the initial contact, McDougal recalled, Gerth drove down to Arkadelphia to visit him. McDougal plied the reporter with documents and canceled checks allegedly showing that the Clintons had taken improper tax deductions and had failed to pay their fair share of Whitewater expenses. According to McDougal, he subsequently came up to Nelson’s Little Rock office and gave him damaging information about Tucker. Nelson, he claimed, was delighted. Within weeks, Jeff Gerth was sharing piles of documents he believed might implicate Tucker with Little Rock journalists. The Times, he explained, was only interested in Bill Clinton.
Gerth’s original article won praise from the American Journalism Review for containing “80 to 90 percent” of what the press ultimately learned about Whitewater. Even some Clinton loyalists acknowledged that the story examined legitimate issues concerning the Clintons’ finances and Hillary Clinton’s law practice. Unfortunately, its mistakes began with the headline: “CLINTONS JOINED S & L OPERATOR IN AN OZARK REAL ESTATE VENTURE.” Actually, when the Whitewater partnership was formed in 1978, McDougal hadn’t been involved in the banking or thrift businesses at all. He was a political science teacher at Ouachita Baptist University who had done well investing in real estate. McDougal didn’t acquire a controlling share in the small institution he renamed Madison Guaranty until five years later, by which time the Whitewater project was virtually defunct.
Judging by subsequent stern editorials in the Times, the rest of the story could be summarized more or less as follows: When he was governor, Clinton and his wife entered into a sweetheart deal with a crooked financier at no risk to themselves. When their benefactor got into trouble, Clinton dumped the sitting Arkansas securities commissioner and appointed a political ally named Beverly Bassett Schaffer. He and Hillary then pressured Bassett Schaffer to grant special favors to Madison, until vigilant federal regulators cracked down and thwarted their scheme. When exposed by Gerth, Bassett Schaffer claimed a convenient memory loss, denying complicity in events she had supposedly forgotten. “In interviews,” Gerth had written, “Mrs. Schaffer … said she did not remember the Federal examination of Madison, but added that in her view, the findings were not ‘definitive proof of insolvency.’ … ‘I never gave anybody special treatment,’ she said.’”
The problem, as Bassett Schaffer had pointed out in twenty pages of memoranda she had provided to Gerth, was that this version of events was mostly false. First, the Clintons and McDougals were jointly and severally responsible for the Whitewater loan. Moreover, federal regulators did not determine that Madison Guaranty was insolvent between 1984 and 1986, the years Gerth’s story covered. The Federal Home Loan Bank Board had formally accepted Madison’s debt-restructing plan in a letter dated September 11, 1984—a full six months before Bassett Schaffer’s appointment. Nor was her appointment connected to Madison’s troubles. She had filled a vacancy created when her Republican-appointed predecessor (who described the Times story as “unmitigated horseshit”) resigned to enter private legal practice.
More important, Arkansas had no authority to close state-regulated S&Ls without the concurrence of the federal agencies who held the real power. “It may be important for you to know,” Bassett Schaffer had written Gerth, “that state law grants the savings and loan supervisor no emergency acquisition authority similar to that of the FHLBB and FSLIC (the Federal Savings and Loan Insurance Corporation).” Subsequent Senate hearings would establish that not
one of the 746 institutions that failed during the S&L crisis of the eighties was shut down by state officials anywhere in the country. Bassett Schaffer had been an active participant in a July 1986 decision to remove Jim and Susan McDougal from control of Madison Guaranty S&L after auditors discovered his insider trading and other abuses. She had also directed the Times reporter’s attention to her certified letter dated December 10, 1987, all but begging federal regulators to shut down Madison and two much larger Arkansas S&Ls. She had gotten no answer until the feds finally closed Madison’s doors in February 1989, roughly a month after President George Bush’s inauguration.
According to Walter Faulk, then director of supervision for the FHLBB in Dallas, “I never saw her take any action that was out of the ordinary … . To my knowledge, there is nothing that she or the governor of Arkansas did or could have done that would have delayed the action on this institution.”
When the Times story appeared, Bassett Schaffer briefly considered filing a libel suit. “I provided you with a detailed account in writing of the facts,” she wrote Gerth bitterly. “This information was ignored and, instead, you based your story on the word of a mentally ill man [McDougal] I have never met and documents which you admitted to me on the telephone on February 26,1992, were incomplete.” He never wrote back to her. “I subsequently had conversations with her in which I tried to explain the situation. I sought to come down and meet her,” he said later. “I had hoped to explain what happened with the editing of the first piece. She never would agree to see me.” Because his errors and inferences had appeared on the front page of the New York Times, they would be repeated as gospel by other reporters for years to come.
Jim McDougal was likewise stunned by Gerth’s initial foray into Whitewater. The article suggested that McDougal had criminally misused Madison deposits to subsidize the development. Having set out to hurt Tucker and Clinton, he had inflicted the worst injuries on himself. Sam Heuer, the Little Rock attorney who had successfully defended McDougal during his 1990 bank fraud trial, issued a statement: “I am appalled and affronted by the allegations and reckless disregard of the facts by the New York Times and its reporter Jeff Gerth.”
The Clinton campaign dispatched attorney Jim Blair, an old friend of the Clintons and McDougal alike, to remind their former partner that further unguarded comments to reporters could have consequences more harmful to himself than to anybody else. When an Associated Press reporter contacted McDougal a couple of days later, he sounded chastened. “I’ve never done anything illegal,” he said, “and as far as I know Bill Clinton has never done anything illegal or unethical.” He would later claim that Blair had threatened him with a lawsuit.
But McDougal’s retraction meant little. According to McDougal, weeks earlier, Sheffield Nelson had secretly taped him making several rash allegations,
and Nelson proceeded to copy and distribute the tape to every journalist who would listen. To Nelson, McDougal had asserted that the Clintons never lost money on Whitewater. “I could sink [that] quicker than they could lie about it if I could get in a position so I wouldn’t have my head beaten off,” McDougal had said.
Meanwhile, confronted by Clinton campaign aide Susan Thomases about the shortcomings in his work, Jeff Gerth was initially somewhat apologetic, she recalled. He had planned a more extensive, three-part series on the Clintons’ finances, she said Gerth had told her, only to have his piece chopped down to fifteen hundred words by his editors. Thomases also remembered Gerth mentioning that his Washington bureau chief, a southerner named Howell Raines, disliked Clinton and was largely responsible for the story’s tone. Gerth later denied blaming Raines, although he said he “was upset” by the way his original Whitewater copy was edited and did request changes after the paper’s first edition appeared (including the addition of a quote from Bassett Schaffer denying she had favored McDougal). There was no plan for a “series,” he added, and he thought it was “highly unlikely” that the Whitewater story actually had been edited by Raines.
Campaigning in the New York primary, former California governor Jerry Brown frequently denounced the sleazy appearance of Hillary Clinton’s law practice. In response, the Clinton campaign commissioned an accounting of Whitewater overseen by a Denver attorney and Clinton friend named James Lyons (no relation to the author). Hillary also asked Webster Hubbell and Vincent Foster, her two closest associates at the Rose Law Firm, to help explain her work for Madison. A more ill-starred pair of defenders could hardly be imagined, although she had no way of knowing that. In the process of gathering information, Foster obtained a computer printout from the law firm of Hillary’s Madison Guaranty billing records.
The Lyons report, released by the campaign in late March, concluded that the Clintons had lost about $65,000 on the project. Due to insufficient information given them by McDougal, the Clintons had improperly deducted a handful of interest payments from their income taxes, amounting to a tax savings of less than $2,000. Although the five-year limit had long passed, the couple made a point of paying the back taxes. But at least for the time being, the Clinton campaign’s swift response had put the Whitewater issue to rest. How much scandal could there be in a gravel-road real estate development in which the Clintons had ultimately lost money?
One aspect of the story that would never receive much attention was Jim McDougal’s psychiatric history. In his initial 1992 article, Jeff Gerth noted that McDougal suffered from manic-depressive disorder, but described him as
“stable, careful and calm.” Aside from that reassuring reference, McDougal’s affliction and its effect on his turbulent business and personal life were rarely mentioned.
McDougal’s illness had much to do with his problems. Among the symptoms psychiatric manuals list for a manic episode are the following: “inflated self-esteem (grandiosity, which may be delusional)” and “excessive involvement in activities that have a high potential for painful consequences which is not recognized, e.g. buying sprees … foolish business investments.” It’s common for manic individuals to succumb to “grandiose delusions involving a special relationship to God, or some well-known figure from the political, religious or entertainment world.”
McDougal’s attorney had gone so far as to file, and later withdraw, an insanity plea during his 1990 bank fraud trial. Given his financial situation during the 1980s—his heavily mortgaged real estate investments, his ownership of a small, unprofitable bank and floundering S&L—and the fact that McDougal suffered from manic-depressive illness, serious trouble was inevitable.
Jeff Gerth’s Sunday article may have left little impression on most Times readers, but to L. Jean Lewis in Tulsa, Oklahoma, it was thrilling. She was not, as it turned out, alone in her excitement.
Lewis was an investigator for the Resolution Trust Corporation (RTC), the temporary federal agency created during the Bush administration to bail out the savings and loan depositors and liquidate the assets of institutions seized by the government. A thirty-eight-year-old former executive secretary in a failed Dallas thrift, Lewis was neither a lawyer nor a CPA. When she joined the RTC she had no previous law enforcement experience. Having grown up in a military family in Texas, Lewis proudly identified herself as a conservative Republican. (In a contemporaneous letter to a friend, she described Bill Clinton as a “lying bastard.”)
She worked out of the RTC’s Tulsa office, and her job was mostly routine: to sift through the records of failed Arkansas thrifts for evidence of fishy transactions. Consulting closely with the FBI’s Little Rock office, Lewis had compiled a prioritized list of Arkansas institutions to be looked into. At the top, as of December 1991, she had placed the two largest failed thrifts in the state, Saver’s Savings and First Federal, both headquartered in Little Rock. Saver’s had collapsed at a cost of $650 million, First Federal at a cost of $950 million—both amid strong FBI suspicions of criminal fraud. First Federal alone had squandered roughly twenty times the amount lost by Jim McDougal’s Madison Guaranty, which was listed, sensibly enough, near the bottom of Lewis’s list.
All that changed, however, with the publication of Gerth’s story three months later. The following morning, on March 9, the RTC’s Tulsa field office got two calls from senior RTC officials in Washington inquiring about the accuracy
of Gerth’s allegations. The acting head of investigations looked over the Madison Guaranty file and responded with a memo stating that “the Whitewater Development loan was not specifically classified by Federal Examiners, and … [the record] does not show any losses related to the Clintons or Whitewater development … . Bill and Hillary Clinton are not named in any of the documents contained in our criminal referral files.” In fact, neither Whitewater nor the Clintons had ever borrowed from Madison Guaranty.
Nevertheless, Lewis and her supervisor, Richard Iorio, moved Madison Guaranty to the head of their investigative list. Lewis quickly headed to Little Rock to search out more documents stored in a downtown warehouse.
Did Hillary Rodham Clinton know about or suspect problems with Whitewater that she didn’t want the press to discover? Certainly what she had learned when she took over the tangled affairs of the Whitewater Development Corporation in 1988—after McDougal had left the hospital and moved to California—had given cause for concern. Piecing together the company’s jumbled records had been almost impossible, and many documents were missing. Property taxes, in some instances, hadn’t been paid for years. The owner of a lot financed personally by Hillary had gone into bankruptcy. (She had never been notified, and McDougal had made no payments on the note.) The corporation’s state franchise fees hadn’t been paid for several years, a potential disaster had Bill Clinton’s political rivals ever uncovered it.
Given the depressed real estate market during the mid-eighties, Whitewater probably would have lost money anyway. The site, though picturesque, had been badly chosen. The nearest towns with gas stations, grocery stores, a hospital, or a golf course were more than a forty-five-minute drive away over narrow, steep, curvy roads. And Marion County, where Whitewater is situated, is also dry—no alcoholic beverages. Years later, when an objective accounting of the project became available, it became clear that as Whitewater’s managing partner, McDougal turned a poor investment into something much worse. He had treated the Clintons’ investment as if it belonged to him personally, abused their trust, sold the company’s assets at a steep discount to the realtor who was supposed to be their agent, deceived his partners about it over a period of several years, and arguably committed several crimes in the process.
In 1985, without telling his partners, McDougal had liquidated Whitewater’s real estate assets for pennies on the dollar. He sold all of Whitewater’s remaining lots (twenty-four of the original forty-four) to one Chris Wade, the realtor charged with marketing and selling the development. The asking price for twenty-three of those twenty-four lots, according to a “Whitewater Estates” inventory list dated November 1984, had been $191,550. In return for the land, Wade paid down no cash. He agreed to assume $35,000 of the $96,000 still owed by the Clintons and McDougals on the original 1978 loan that had financed
the project. (Wade was so slow to pay that the bank was still charging the Whitewater Development Company interest on the money until 1992.) McDougal also accepted from Wade a 1979 Piper Seminole airplane, worth $35,000, which he promptly pressed into service as Madison Guaranty’s official corporate aircraft. Eventually he sold the airplane and kept the money.
Whitewater’s real estate assets were gone, but the Clintons didn’t know it. They wouldn’t learn many of these details until years after the fact. Outwardly flush, in May 1985, Madison Guaranty put the Rose Law Firm on a $2,000-a-month retainer, and McDougal hosted a political fund-raiser for the governor in the lobby of the thrift’s newly refurbished downtown Little Rock headquarters. It wasn’t until she took over the company’s records that Hillary and her accountants learned that the company had been all but formally defunct for more than four years. Although more than $134,000 had been deposited in the Whitewater account between 1984 and 1986 from other McDougal-owned companies, a similar amount had been paid out, much of it to individuals and companies having nothing to do with Whitewater.
In November 1986, McDougal had written the Clintons offering a deal. The letter arrived several months after the Rose Law Firm had dropped Madison Guaranty as a client, and regulators had forced his removal from the S&L. McDougal had also recently suffered a stroke, and he was hospitalized for manic-depressive illness. To spare them any public embarrassment, he proposed that they simply hand over their share of Whitewater. In essence, he was offering to buy their share of the corporation for half the amount of the $90,000 losses, which he planned to claim on his federal taxes. The problem was that the company still owed almost $90,000 to Citizens Bank, which refused to release the Clintons from liability. In effect, they were being asked to give up their share of what they mistakenly believed was an asset in return for assuming a $90,000 debt.
Not surprisingly, Hillary Clinton balked and demanded to see Whitewater’s books, infuriating McDougal. In December 1986 he wrote the Clintons again. Despite current cash-flow problems, he claimed, Citizens Bank had agreed to reduced payments, and the Clintons didn’t owe him any money. There was no such agreement with the bank. By 1988, after both McDougals had left for California, Hillary Clinton was forced to take over the management of Whitewater—finding an empty shell, its assets stripped, its debts and taxes unpaid, its records disordered and incomplete.
The Madison ledgers Jean Lewis pulled from the dusty Little Rock warehouse were as chaotic as the Whitewater documents Hillary Clinton had taken possession of four years earlier. Worst of all were the records of the checking accounts of McDougal’s dozen real estate companies. What Lewis uncovered would have confirmed Hillary’s worst fears.
Madison Guaranty had drifted into deep financial distress for the same reason hundreds of other thrifts did during the eighties. Forced by the Federal Reserve to pay ruinously high interest rates on deposits, their income was restricted by the long-term low-interest mortgages they held. Hemorrhaging money, they were encouraged by Congress and the Reagan administration to make up the difference by speculating in real estate. Those regulatory “reforms” had lured McDougal into the thrift business, but no sooner had he taken over Madison Guaranty than the same ruinously high interest rates sent the real estate market into a tailspin.
Faced with cash-flow problems, Lewis found, McDougal had begun a frantic fiscal juggling act, commingling funds and moving money back and forth among the corporations and partnerships he controlled. The Clintons and Jim Guy Tucker were by no means the only business partners whose trust he abused.
Following Gerth’s lead, Lewis focused her attention on the last six months of 1985, when Beverly Bassett Schaffer had supposedly done favors for Madison Guaranty’s owner. Finding evidence of Jim McDougal’s fiscal shenanigans everywhere she looked, Lewis leaped to a conclusion well beyond the New York Times reporter’s imagining. Everyone in Arkansas who had ever done business with Madison Guaranty, including the Clintons, was part of a huge conspiracy, she seemed to surmise in her criminal referrals. Every transaction that appeared to benefit McDougal must also have benefited his partners, according to her theory.
By August 1992, the Little Rock FBI agents assigned to investigate financial crime were growing impatient with Lewis. Her agency, having seized the records of bankrupt institutions across the country, controlled all the paperwork in thrift investigations. Without referrals from the RTC, law enforcement officials could not move forward on potential fraud cases. Lewis’s months of work on Madison Guaranty struck the agents as a waste of time and money, and her motives seemed suspiciously political. On August 26, FBI special agent Steven Irons spoke with Lewis by phone. He took notes of the conversation.
According to his notes, Lewis informed Irons that she had been given a deadline of August 31 to file a referral on Madison Guaranty, and that there were “big names involved.” Lewis claimed that she “gave up a job opportunity in D.C. just to do referral. She or it could alter history—very dramatic.” Irons would later testify he had no doubt that Lewis’s motive was to disrupt the 1992 presidential election in favor of George Bush. Later that day, his Little Rock supervisor, Special Agent in Charge Don Pettus, sent a telex to FBI Headquarters in Washington, expressing his professional frustration. Pettus sought permission to press ahead on the First Federal and Saver’s Savings cases without the RTC’s help.
On August 31, Lewis delivered as promised. She filed a criminal referral with the FBI and the U.S. attorney in Little Rock, naming not only James and Susan McDougal as felony suspects, but also each and every contributor to the 1985 Clinton fund-raising event held at Madison Guaranty. As “possible witnesses” she listed both Bill and Hillary Clinton, Arkansas lieutenant governor Jim Guy Tucker, and former U. S. senator J. William Fulbright, who had also invested with his former aide McDougal. She named no Republicans.
Normally, criminal referrals from the RTC took months to be processed. But within days, Lewis started pestering FBI agent Irons and the U.S. attorney’s staff in Little Rock with demands for immediate action. After Irons stopped returning her calls, she left a taunting message with the office receptionist. “Have I turned into a local pariah,” Lewis demanded, “just because I wrote one referral with high profile names, or do you plan on calling me back before Christmas, Steven?????” (She specifically dictated the five question marks.) Irons returned her call only to tell her to back off.
Word of Lewis’s efforts filtered back to the Clinton campaign sometime between mid-September and early October, when longtime aide Betsey Wright got a phone call from a supporter in California. On a recent business trip to Kansas City, the man said, he had attended a cocktail party where a female RTC staffer boasted that she had “just sent a criminal referral up to the prosecutor in Little Rock … which would implicate the Clintons.” (Three months earlier, the RTC had closed its Tulsa office and transferred Jean Lewis to Kansas City.) And although Wright had no way of knowing it, there were signs around the same time that the White House, the Justice Department, and the Bush campaign were taking a direct interest in Lewis’s machinations.
William Barr, then serving as Bush’s attorney general, later testified that White House cabinet secretary Edith Holiday asked him about the Lewis referral during a flight on Air Force One on September 17, 1992. At the time, Holiday was “chief liaison” between the White House and the 1992 Bush-Quayle campaign. Previously she had served as operations director of the 1988 Bush-Quayle campaign, and then as general counsel to the Treasury Department. That week, Barr asked his aides to contact the FBI, which informed them it had no record of such a case. He reported back to Holiday, who seemed surprised. Her demeanor made him wonder whether “she had better information” than he did, he recalled. (Under oath, Holiday later said she did not remember any conversations with Barr about Madison Guaranty and the Clintons.)
On September 18, Lewis turned up in Irons’s Little Rock office after a meeting he did not attend. The agent told her that due to its sensitivity, no action would be taken on her referral until after the November election. She warned him
that RTC officials in Washington expected action. Much to Lewis’s eventual chagrin, Irons once again made contemporaneous notes of their conversation.
At the same time, Lewis made repeated calls to career prosecutors on the staff of U.S. Attorney Charles Banks. They too questioned both her motives and her referral’s substance. Assistant U.S. Attorney Fletcher Jackson saw no point in pursuing McDougal again. “The prior acquittal,” he told Banks, “would be used against you to make this look like a vindictive prosecution.” What Lewis described as illegal “check-kiting” at Madison, Jackson regarded as a slightly different kind of scam, though he didn’t quarrel with her terminology. Check-kiting usually involves writing bad checks among several banks to create illusory balances. Instead, McDougal was shifting money back and forth among several accounts within his own bank.
“From appearances,” he would later testify, “it’s just McDougal taking care of McDougal and McDougal’s corporations … . What it appeared to be was that most of the manipulation Mr. McDougal was doing was to make the debt carry. In other words, he was doing all of these fraudulent transactions, in a sense, in order to make his interest payments and principal payments on debts that he had.” If McDougal’s actions were in fact crimes—and Jackson had his doubts—the Clintons and his other business partners appeared to be his victims, not his accomplices.
Around the end of September or the beginning of October, the White House also displayed a discreet interest in the Madison matter. Sometime during that period, White House counsel C. Boyden Gray called Albert Casey, the chief executive of the RTC in Washington. Casey later testified that Gray asked him what he knew about an RTC matter involving the Clintons. He knew nothing, Casey said he replied, but he promised to look into it and call Gray back.
Casey then called RTC vice president William Roelle, who confirmed the existence of Lewis’s referral, and showed him a copy. Roelle later testified that he told Casey that he should not provide any information to the White House. Before Casey could reach Boyden Gray, however, the White House counsel phoned him again. “Al, forget my request,” Casey remembered Gray saying. “I don’t want you to tell me a thing.” Gray himself would later deny any memory of those conversations with Casey. Any such call, he said, would have come from the Bush campaign, not the White House. Campaign officials echoed Gray’s denial, saying they had no idea that Madison was being investigated in 1992, and that the campaign had a strict rule that “nobody … was to talk to anybody in the government about Clinton.” Only a “third-level, junior person” would have done something like that, they insisted.
Attorney General Barr was considerably less cautious. After his conversation with Edith Holiday, Barr insisted that his aides check once again whether
Madison was the subject of a Justice Department probe. When a second inquiry to the Executive Office of U.S. Attorneys brought confirmation of the RTC referral, Barr became angry because he felt that Chuck Banks had “deliberately witheld information about the referral from me.”
On October 7, the Little Rock office of the FBI responded with a lengthy telex to its superiors in Washington, expressing extreme skepticism about the validity of Lewis’s referral. After summarizing Jim McDougal’s 1990 trial and shaky psychological state, it added that despite “the referral’s stated supposition that the activity was for the benefit of the McDougals, the further supposition that other people benefitted does not appear to be factually supported by the details that follow.
“It is the opinion of Little Rock FBI and the United States Attorney … that there is indeed insufficient evidence to suggest the Clintons had knowledge of the check-kiting activity conducted by McDougal … [who] was in charge of [Whitewater] records, just as he was with the records of other companies involved in the check-kiting, and does not suggest the Clintons had access to checking account statements that would have reflected the questionable transactions … . It was also the opinion of [Banks that] the alleged involvement of the Clintons in wrongdoing was implausible, and he was not inclined to authorize an investigation or render a positive prosecutive opinion.”
On October 8, 1992, Barr sent one of his assistants to a top-level meeting attended by Robert Mueller, the head of the Justice Department’s Criminal Division, FBI assistant director Larry Potts, and several senior FBI officials. At that point, the Madison Guaranty referral was definitely a matter of active interest at Justice. The next day, FBI Headquarters sent a telex to its Little Rock field office, ordering agents there to review Jean Lewis’s criminal referral and report in writing by October 16—less than three weeks before the 1992 presidential election.
As far as Banks was concerned, that order sealed his decision. A native Arkansan, he had been a Republican congressional nominee in 1982 and had also served as general counsel of the state party. As such, he had once brought a lawsuit against Bill Clinton for what he considered the politically motivated firing of a Republican labor commissioner. Appointed by Ronald Reagan in 1988, Banks had been nominated to a federal judgeship in August 1992 by President Bush. His nomination was still pending in the U.S. Senate. If anybody in Arkansas had a personal interest in seeing George Bush reelected in 1992, it was Chuck Banks.
But Banks also had his limits. He would not be used politically. He had come to distrust Jean Lewis’s motives, and believed that charging Jim McDougal again would be a cruel and unnecessary waste of his office’s resources. Further, based on the documents Lewis had produced, he saw no persuasive
evidence against the Clintons or Jim Guy Tucker. More than once Banks discussed the case with Don Pettus, the special agent in charge of the FBI’s Little Rock office, who shared his misgivings.
As the October 16 deadline approached, Banks decided to put his objections in writing. Dictating a letter to Pettus, he began by repeating all the reasons he had turned down the RTC’s criminal referral in the first place. Then he staked out an uncompromising position: “I am now advised that you have been ordered to do an immediate review to determine if an investigation is warranted. As part of same, you are required to send a prospective proposal for such an investigation by Friday, October 16, 1992. Such an order does not apply to this office.
“However, I do believe it might be helpful to reiterate what I have told you previously. Neither I personally nor this office will participate in any phase of such an investigation … prior to November 3, 1992. You may communicate this orally to officials of the FBI or you should feel free to make this part of your report.
“While I do not intend to denigrate the work of RTC,” Banks added, “I must opine that after such a lapse of time the insistence of urgency in this case appears to suggest an intentional or unintentional attempt to intervene into the political process of the upcoming presidential election. You and I know in investigations of this type, the first steps, such as issuance of grand jury subpoenas for records, will lead to media and public inquiries [about] matters that are subject to absolute privacy. Even media questions about such an investigation in today’s modern political climate all too often publicly purport to ‘legitimize what can’t be proven.’
“For me personally to participate in an investigation that I know will or could easily lead to the above scenario … amounts to prosecutorial misconduct and violates the most basic fundamental rule of Department of Justice policy. I cannot be a party to such actions.”
Banks closed by promising to direct “any press inquiry from any source whatsoever” to the attorney general or the head of the RTC. Such a statement from Banks would, of course, have been devastating to the Bush campaign. Whoever won the November election, Chuck Banks’s government career was probably over.
The FBI’s Little Rock office dispatched its report to Washington on October 16 as ordered, stating that there was “absolutely no factual basis to suggest criminal activity on the part of any of the individuals listed as witnesses in the referral.” The telex went on to complain again about the RTC’s failure to provide criminal referrals on the two much larger thrifts, Savers’ Savings and First Federal Savings, whose combined losses of $1.5 billion offered “much greater prosecutive potential” than Madison Guaranty.
Despite fervent denials from the Bush camp, evidence later emerged that the White House had indeed sought derogatory information about Clinton from government agencies—specifically, and unlawfully, from his passport files. To underline the theme that his antiwar activism had been unpatriotic, a White House aide had asked a political appointee in the State Department to verify a rumor that Clinton had once tried to renounce his U.S. citizenship. The charges were so serious that an independent counsel was named to investigate. The special panel of federal appeals judges that appoints such prosecutors picked a former Republican U.S. attorney, Joseph diGenova, to conduct the probe. (The judge with the most influence on the panel, David Sentelle of the U.S. Circuit Court of Appeals for the District of Columbia, was a conservative North Carolinian handpicked by William Rehnquist, chief justice of the United States.) A year later, diGenova concluded the investigation without filing a single indictment.
Aside from the daunting complexities of Whitewater, Boyden Gray’s sudden loss of interest may have reflected worries that were closer to home for the Bush family. Certainly neither the White House nor the Bush campaign would have wanted to risk drawing attention to the business dealings of the president’s sons—in particular, Neil Bush’s role as director of a corrupt Colorado savings and loan whose bankruptcy cost taxpayers a billion dollars. That was a story several reporters were pursuing around the time of Gray’s phone calls to Albert Casey. It was more prudent to forget about alleged financial misdeeds and focus instead on Clinton’s draft evasion.
So there would be no “October surprise” in 1992 for Bill Clinton. Though not for want of trying, Jim McDougal and Sheffield Nelson’s effort to damage his presidential candidacy had failed. And Jean Lewis’s apparent attempt to use the criminal justice system to subvert the political process had also gotten nowhere.
And for the time being, there would be no Whitewater scandal either. But as the Clintons soon learned, new allegations could be promoted as quickly as old charges were discredited. Their enemies were not really daunted by this defeat, and they would be bringing more tales of Arkansas criminality to the keen attention of the New York Times before too long.