The partnership, a real estate joint venture that was developing land in the Ozarks, involved the Clintons and James B. McDougal, a former Clinton aide turned developer. It started in 1978, and at times money from Mr. McDougal's savings and loan was used to subsidize it. The corporation continues to this day, but does not appear to be active.
Mr. McDougal gave a detailed account of his relationship in several interviews in the last two weeks. This account, along with an examination of related local, state and Federal records and interviews with dozens of others in Arkansas, found the following:
*Available records covering the most active period of the real estate corporation, called Whitewater Development, appear to show that Mr. McDougal heavily subsidized it, insuring that the Clintons were under little financial risk in what turned out to be an unsuccessful enterprise. The corporation bought 200 acres of Ozark Mountain vacation property and planned to sell it in lots. During this period, the Clintons appear to have invested little money, so stood to lose little if the venture failed, but might have cashed in on their 50 percent interest if it had done well.
*The Clintons and Mr. McDougal disagree about what happened to Whitewater's records. Mr. McDougal says that at Mr. Clinton's request they were delivered to the Governor's mansion. The Clintons say many of them have disappeared. Many questions about the enterprise cannot be fully answered without the records.
*After Federal regulators found that Mr. McDougal's savings institution, Madison Guaranty, was insolvent, meaning it faced possible closure by the state, Mr. Clinton appointed a new state securities commissioner, who had been a lawyer in a firm that represented the savings and loan. Mr. Clinton and the commissioner deny giving any preferential treatment. The new commissioner approved two novel proposals to help the savings and loan that were offered by Hillary Clinton, Governor Clinton's wife and a lawyer. She and her firm had been retained to represent the association.
*The Clintons improperly deducted at least $5,000 on their personal tax returns in 1984 and 1985 for interest paid on a portion of at least $30,000 in bank loan payments that Whitewater made for them. The deductions saved them about $1,000 in taxes, but since the error was more than three years ago, Internal Revenue Service regulations do not require the Clintons to pay.
The complicated relationship between Mr. McDougal and the Clintons came to light in an investigation by The New York Times of the Clintons' tax records and business relationships. It raises questions of whether a governor should be involved in a business deal with the owner of a business regulated by the state and whether, having done so, the governor's wife through her law firm should be receiving legal fees for work done for the business. Confusion Is Cited
Asked about these matters, the Clintons retained two lawyers to answer questions. The lawyers said the improper tax deductions were honest errors, made because there was confusion over who really owned a certain piece of Whitewater property and who was responsible for the loan taken out to buy it, Whitewater or the Clintons.
The deed for the land and the loan papers are all in the Clintons' names.
The lawyers said they were not in a position to answer questions about where the money that went into Whitewater came from. But generally, they said they thought neither the Clintons nor Mr. McDougal had profited from the venture. They also said the Clintons were once liable for about $100,000 in bank loans that financed Whitewater's original purchase of land. But the lawyers have only been able to find original documents showing $5,000 that the Clintons paid.
Some questions about the relationship and the Clintons' role in it may be difficult to resolve because of differing accounts and the missing records.
The two lawyers representing the Clintons are Susan P. Thomases, a longtime friend, and Loretta Lynch, a campaign aide, who participated in several hours of interviews at Ms. Thomases' Manhattan offices Thursday and Friday. Payments on Debt
The records that are available, and Mrs. Thomases' account, show that Whitewater made payments between 1982 and 1985 on Mrs. Clinton's $30,000 real estate debt, reducing the debt by about $16,000 while also paying at least $14,000 in interest. At least one of those checks was signed by Mr. McDougal.
Mrs. Clinton originally borrowed the $30,000 from a bank also controlled by Mr. McDougal, Bank of Kingston, but "Hillary took the loan on behalf of the corporation," Ms. Thomases said. That, she explained, is why Whitewater made the payments.
The Clintons' 1984 and 1985 tax returns show that they took deductions for interest payments of $2,811 and $2,322 that Whitewater had made.
"It clearly is an error," Ms. Thomases said. She noted that the tax returns for those years were prepared by accountants in Arkansas.
The Clintons' gross income in 1984, as reported on their tax returns, was about $111,000 and they paid $22,280 in Federal taxes. In 1985, their reported income was about $102,000, and they paid $18,791 in Federal taxes.
Longtime Friendship
Mr. Clinton and Mr. McDougal had been friends since the 1960's. When Mr. Clinton became the nation's youngest Governor at 32 years old, he took Mr. McDougal into his administration as an aide for economic development. It was at about this time that the men formed Whitewater.
A few years later Mr. McDougal, having left government in 1979, bought control of a small savings and loan association, Madison Guaranty, and built it into one of the largest state-chartered associations in Arkansas.
But over time, the savings and loan got in trouble, like many others around the country. Finally Federal regulators took the savings and loan away from Mr. McDougal, and a Federal grand jury charged him with fraud, though he was acquitted. The Clintons were not involved in those proceedings.
Mr. McDougal began having personal problems, too. He was found to be suffering from manic-depressive illness, though he was judged competent to stand trial. In the interviews, Mr. McDougal appeared stable, careful and calm.
A year after the Clintons and McDougals bought the Ozark Mountain property and founded Whitewater Development in 1979, the corporation bought a modular house for about $22,000 and placed it on one of its lots. That lot was then conveyed to Mrs. Clinton, and the deed indicates that she paid nothing for it. Ms. Thomases says this was an error by Whitewater. The deed, she said, should have shown the price and said that Mrs. Clinton paid.
But the house was carried on the books as a Whitewater corporate asset and used as a model house to attract other buyers, according to Whitewater records produced by Ms. Thomases. Because the records are incomplete, it is unclear exactly what happened. But about the same time, Mrs. Clinton personally borrowed $30,000 from Mr. McDougal's bank to pay for the house and the lot.
Ms. Thomases said Mrs. Clinton and the corporation regarded this as a corporate debt, though it was in Mrs. Clinton's name. The corporation included no one but the Clintons and the McDougals. It was this debt that Whitewater made payments on until the end of 1985.
One year after acquiring the property, Mrs. Clinton sold it for $27,500, with payments to be made over time, records show. It is not clear who received the buyer's down payment of $3,000. But Ms. Thomases said it was the corporation that took the loss on its books. A few years later, the buyer went bankrupt and stopped making payments, and then he died.
In 1988 Mrs. Clinton bought back the house from the estate of the buyer. Records show that she paid $8,000 and then resold the property a short time later for about $23,000, after closing costs. The Clintons reported a capital gain that year of $1,640.
Ms. Thomases explained that the capital gain was small because, as part of that transaction, Mrs. Clinton had to pay off Whitewater's remaining $13,000 debt on the property, originally incurred by Mrs. Clinton. The payments the previous owner had been making to Whitewater before he went bankrupt had been used to help pay off that debt.
Account Overdrawn
It was during the period when Whitewater was making the Clintons' loan payments that Madison Guaranty was putting money into Whitewater.
For example, Whitewater's check ledger shows that Whitewater's account at Madison was overdrawn in 1984, when the corporation was making payments on the Clintons' loan. Money was deposited to make up the shortage from Madison Marketing, an affiliate of the savings and loan that derived its revenues from the institution, records also show.
It was also in 1984 that Madison started getting into trouble. Federal examiners studied its books that year, found that it was violating Arkansas regulations and determined that correcting the books to adjust improperly inflated profits would "result in an insolvent position," records of the 1984 examination show.
Arkansas regulators received the Federal report later that year, and under state law the securities commissioner was supposed to close any insolvent institution.
As the Governor is free to do at any time, Mr. Clinton appointed a new securities commissioner in January 1985. He chose Beverly Bassett Schaffer, a lawyer in one of the firms that had been representing Madison. Fund-Raising Ideas
Ms. Thomases, after talking to Mr. Clinton this week, said the Governor chose her because they were friends, and because he wanted to appoint a well qualified woman to an important post.
In interviews, Mrs. Schaffer, now a Fayetteville lawyer, said she did not remember the Federal examination of Madison but added that in her view, the findings were not "definitive proof of insolvency."
In 1985, Mrs. Clinton and her Little Rock law firm, the Rose firm, twice applied to the Securities Commission on behalf of Madison, asking that the savings and loan be allowed to try two novel plans to raise money.
Mrs. Schaffer wrote to Mrs. Clinton and another lawyer at the firm approving the ideas. "I never gave anybody special treatment," she said.
Madison was not able to raise additional capital. And by 1986 Federal regulators, who insured Madison's deposits, took control of the institution and ousted Mr. McDougal. Mrs. Schaffer supported the action.
The owner of a failing Arkansas savings and loan association raised money for Gov. Bill Clinton in 1985 to help relieve the Clinton family of a $50,000 personal debt that the Clintons would otherwise have had trouble repaying, newly discovered documents show.
The disclosure that the money covered a heavy private debt, rather than a less personally onerous campaign obligation, shows that the savings and loan executive, James McDougal, performed a more valuable favor for Mr. Clinton than has been previously known.
Federal investigators and Congressional officials are looking into the costly collapse of Mr. McDougal's savings and loan, and one aspect of the inquiries is whether his friendship with the Governor influenced the state regulatory treatment he received.
The Government took over the institution, Madison Guaranty Savings and Loan, in 1989 at a cost to taxpayers of more than $60 million. That was five years after Federal regulators first found numerous violations at Madison and three years after they acted to remove Mr. McDougal.
Three months before Mr. McDougal helped Mr. Clinton cover his debt, the Governor had appointed as the new state regulator in charge of savings and loans a Little Rock lawyer who had previously represented Mr. McDougal's troubled institution.
Over the next 18 months, up to the point where Federal officials removed Mr. McDougal, the new regulator took no significant action against Madison, even as she was moving vigorously against another failing institution with similar problems.
Bruce Lindsey, a senior Presidential adviser chosen by the White House to respond to questions about Mr. McDougal, said today that the relationship between the Clintons and the savings and loan owner had been entirely proper.
But Mr. Lindsey said he was unable to answer specific questions about the $50,000 debt or its repayment. As for the appointment of the regulator, Beverly Bassett Schaffer, he said, "The President felt she was a respected securities attorney and turned out to be a respected securities commissioner."
A Federal investigation uncovered evidence some time ago that Mr. McDougal had diverted money from his institution to help repay debts left over from Mr. Clinton's 1984 re-election campaign.
But the newly discovered documents, and interviews with onetime political aides to Mr. Clinton, show for the first time that the campaign's only debt was to Mr. Clinton, who had contributed $50,000 to help finance his own candidacy. Mr. Clinton borrowed the money from the tiny Bank of Cherry Valley, which was owned and run by a senior aide to the Governor.
By borrowing the money and giving it to his campaign, Mr. Clinton was incurring a liability that his financial records suggest he barely could have met without help.
Just a few weeks after Mr. McDougal raised the money for him, Madison Guaranty won approval from Mrs. Schaffer, Mr. Clinton's new financial regulator, for a novel plan to sell stock. And Federal investigators have learned that Mrs. Schaffer previously served for a short time as one of Madison's lawyers.
In her legal work, the investigators say, she gained inside knowledge of some of Madison's wrongdoing. Yet when she became a regulator, she never told her subordinates that she had worked for Madison, present and former state officials say. And she continued to make decisions about the institution despite state ethics guidelines that, according to leading ethics experts in Arkansas and nationally, suggest she should have stepped aside.
Mrs. Schaffer, now a lawyer in Arkansas, denied in an interview that Madison had received preferential treatment and said her predecessor in the post had allowed Madison to pursue risky investments. She said Mr. Clinton had not intervened on behalf of Madison, adding of her own role: "I didn't try to protect anyone. And I didn't try to hurt anyone."
In an interview last year, Mr. McDougal said the appointment of Mrs. Schaffer and his role in retiring the campaign debt were part of a relationship in which he and Mr. Clinton had done favors for each other. Mrs. Schaffer was his preferred candidate for the post of regulator, he said.
By 1985, however, he had come to resent Mr. Clinton's requests for help on such matters as the campaign debt, Mr. McDougal said.
"I was beginning to feel I was getting used," he said. "I would have gotten Bassett anyways," he said of Mrs. Schaffer. Rapid Growth, 'Willful' Violations
Mr. McDougal's relationship with Mr. Clinton dates from the 1960's, when they met while working as aides to Senator J. W. Fulbright, Democrat of Arkansas.
Mr. McDougal later served for a year as Governor Clinton's economic development aide, then left government and in 1982 bought a savings and loan in Augusta, Ark., a sleepy rural town. The institution, Madison Guaranty, quickly got caught up in the go-go ethos of the early 1980's. Its growth was exponential, from assets of $3 million to more than $120 million by 1985.
Federal auditors took a dim view of Mr. McDougal's activities. A 1984 review found "unsafe and unsound lending practices" and concluded that "the viability of the institution is jeopardized."
Mr. McDougal promised to make amends, and state and Federal regulators eventually allowed him to go forward, provided he made adjustments to his books and obtained required state approval for several large real estate projects.
One of those was a project to sell land on a foggy Canadian island off the coast of Maine. In violation of Federal land law, Madison had sold scores of lots without making disclosure of risks to purchasers and had failed to register any such disclosure statement with the Department of Housing and Urban Development, according to state and Federal records and former Madison officials.
Madison's lawyers learned of these omissions in 1984. Mrs. Schaffer, then at the Little Rock firm of Mitchell, Williams, Selig, Jackson & Tucker, wrote a memo describing the failure to comply with land law as "willful," Federal officials say.
Madison registered with HUD in February 1985 and began providing buyers the federally required disclosure on the project's considerable risks. One year later, roughly half the buyers of Canadian lots had canceled their purchases, increasing Madison's losses and pushing it to the brink of insolvency, according to a 1986 Federal examination of the institution.
As Mr. McDougal faced questions from Federal regulators, Mr. Clinton was gearing up for his 1984 re-election campaign for governor. By the fall of 1984, he had raised hundreds of thousands of dollars for the drive, and polls showed him comfortably ahead.
Still, in the final week Mr. Clinton put himself at significant personal financial risk to inject an additional $50,000 into the coffers. He and his wife, Hillary, applied for a loan from the Bank of Cherry Valley, a tiny institution in northeast Arkansas then run by W. Maurice Smith, who was also a senior aide to the Governor.
Mr. Smith said in an interview that the loan had been unsecured, meaning that the Clintons had not been required to pledge any collateral and would repay the loan on the basis of their joint income. According to the Clintons' tax returns, their combined income in 1984 and 1985 was about $100,000 a year.
Further, they had only modest personal assets. They did not own a home, and they had substantial debts. Records released by the Clinton Presidential campaign in 1992 show that in 1984, the couple owed more than $75,000 in bank loans stemming from their investment in Whitewater Development, an unsuccessful real estate company that they owned jointly with Mr. McDougal and his wife.
Asked whether he was aware of the Clintons' debts when he approved the loan, Mr. Smith said that "if it was in their financial statement" that they filed with the bank as a requirement for the loan, then "I knew about it." A Spring Evening Worth $35,000
In January 1985, Mr. Clinton named Mrs. Schaffer as head of the State Securities Department, the Arkansas agency that shared with Federal regulators the responsibility for overseeing state-chartered savings and loan associations.
Separately, his political aides began raising tens of thousands of dollars for his 1986 re-election bid. At the same time, according to Mr. McDougal and Betsey Wright, who had managed the 1984 campaign, Mr. Clinton asked Mr. McDougal to take care of the debt still left over from 1984.
"He asked me to knock out the deficit," Mr. McDougal recalled.
In the spring of 1985, Mr. McDougal held an early-evening fund-raising event at Madison's office in Little Rock, near the governor's mansion. There, he says, he delivered about $35,000 in checks to Ms. Wright.
The records reflecting the contributions from the fund-raiser are missing from campaign documents on file with the Pulaski County clerk in Little Rock. But among the documents that are on file there are those listing Mr. Clinton's $50,000 contribution to his own campaign.
Investigators reviewing Madison's records in the wake of its collapse found evidence that led them to suspect that some of the campaign donations assembled by Mr. McDougal had been improperly diverted from the savings and loan, Federal officials have said.
The investigators traced checks totaling $12,000 from Madison to the Clinton campaign's account at the Bank of Cherry Valley. Those checks were issued on April 4.
The day before, senior Madison officials met in Dallas with Federal regulators who wanted to know how the savings and loan intended to meet minimum requirements for capital. Madison said it planned to raise the money by selling stock, according to a Federal memo describing the meeting. The institution planned to issue preferred stock, the sale of which had rarely, if ever, been attempted by an Arkansas savings and loan.
The search for new capital took Madison to the offices of Mrs. Schaffer, who had the ultimate authority to approve any such stock sale. One of the lawyers employed by Madison to argue its case before the state regulators was Mrs. Clinton.
Within weeks, Mrs. Schaffer wrote a letter to Mrs. Clinton giving preliminary approval to Madison's stock plan.
The sale never went forward. But this fall the Resolution Trust Corporation, the Federal agency that disposes of failed savings and loans, asked the Justice Department to examine a number of Madison's transactions, and Federal officials say the state's approval of the stock plan was among the matters raised by investigators.
The R.T.C. noted that Mrs. Schaffer's approval of the stock sale had come in the face of her own, prior knowledge that Madison had failed to comply with Federal land-sale laws.
Mrs. Schaffer says that even in not stepping aside in matters involving Madison, she acted properly. Citing lawyer-client confidentiality, she declines to discuss what she learned when she represented Madison. Whatever she learned, she now says, did not seem important later, when she became a state regulator.
2 Institutions, 2 Approaches
Mr. McDougal, who was acquitted of Federal bank fraud charges in 1990, maintains he did nothing wrong. He blames overzealous regulators for his problems.
But a blistering Federal report in 1986, three years before Madison was seized, found that records were missing or inaccurate, that the institution was probably insolvent and that millions of dollars had been improperly diverted to Mr. McDougal, his friends and his family.
State records show that from 1984 to 1986, as Madison hurtled toward collapse, Arkansas regulators imposed no special requirements on it. The state's only action against Madison was to concur when Federal regulators removed Mr. McDougal in the summer of 1986.
But Arkansas regulators were not hesitant to move against another failing institution.
Mrs. Schaffer said she had urged Federal regulators to shut down Guaranty Savings and Loan, a $450 million institution based in northern Arkansas that was closed in December 1985. She said the problems at Guaranty had been growth that was too rapid, bad loans outside of Arkansas and reliance on large deposits brokered by other financial institutions -- virtually the same problems that regulators found at Madison.
Mrs. Schaffer said she had moved against Madison as soon as legally possible, relying on her own staff and acting in conjunction with Federal regulators. Even looking back now, she said, "I don't see what I could have done differently."
