Friends in Low Places

By JAMES CARNEY/WASHINGTON

Jim McDougal was the kind of go-go entrepreneur that likes to befriend politicians but that politicians sometimes later regret ever having met. His friendship with fellow Arkansan Bill Clinton began in the late 1960s, when both were young staffers for Senator William Fulbright. In 1978 Bill and Hillary joined McDougal and his wife Susan in a real estate venture. A year later, Clinton became Governor and appointed McDougal his economic-development adviser. By the early 1980s, McDougal had left government work to make his fortune: he converted Madison Guaranty, a tiny institution, into one of the largest savings and loan associations in the state. But in 1989 federal regulators found the thrift to be nearly insolvent and shut it down. The following year McDougal was acquitted on charges of bank fraud. Now he's under investigation again.

While hardly anyone accuses Clinton of going into politics to get rich, his wealth of friends can be more problematic. So when stories resurfaced last week linking the President and First Lady to a new federal probe into McDougal's S&L, the details may have revealed less about any financial wrongdoing than about the potential hazards of small-state politics in Arkansas, where the Clintons maintained a close network of political allies and business associates.

Last month federal regulators asked the Justice Department to investigate whether funds from Madison were illegally diverted during the mid-1980s to real estate companies and politicians, including Clinton. According to government officials, $12,000 may have ended up in Governor Clinton's campaign coffers. Some of it may also have been illegally funneled by McDougal into a real estate venture called Whitewater Development, which he and his wife owned with the Clintons. Another, peripheral issue: payments to Hillary Clinton when she represented Madison Guaranty in its bid to resist closure by state thrift regulators while Bill Clinton was Governor.

In each case the investigation is focusing on whether funds were misused by the S&L and McDougal, not whether the Clintons' involvement posed conflicts of interest. The only allegation against the President is being made by David Hale, a former municipal judge, who was indicted in September on charges of defrauding the Small Business Administration. Hale, who ran a federally sponsored lending company in Arkansas, claims that in 1985 Clinton and McDougal pressured him into making an improper $300,000 loan to McDougal's wife. White House officials dismiss the allegation, and Hale has admitted that he has no documentation to back it up.

Federal officials insist that the Clintons are not targets of the investigation and that the only link is their coincidental association with McDougal. Clinton said last week that neither he nor Hillary had done anything improper. "Knowing and being associated with Jim McDougal looked a lot different when he seemed to be a successful entrepreneur than it does now," says Bruce Lindsey, another native Arkansan, now senior adviser to the President. Indeed, based on the evidence known thus far, the Clintons may be guilty only of poor business judgment (they lost nearly $70,000 on the Whitewater deal) and a lack of discrimination in choosing their friends.