Arkansas scandals refuse to disappear: Patrick Cockburn writes from Little Rock where the Clintons and the local establishment mixed business with politics

'BILL CLINTON always panics in the last days of an election,' says an Arkansan political observer. In 1984, running for re-election as governor, this last-minute anxiety led him to borrow dollars 50,000 ( pounds 34,000) for his campaign which he probably did not need. He was well ahead in the polls and won the election easily.

The election over, Mr Clinton needed to repay the money. He himself was never rich. On a salary of dollars 35,000 a year he was the worst paid governor in the United States. He therefore approached his old friend, Jim McDougal, who ran a fast expanding savings and loan bank, Madison Guaranty, to hold a fund-raising party.

This Mr McDougal did. The party was held in Madison's headquarters in a former laundry in Little Rock and dollars 35,000 was raised. All this looks above board - except that some of those whose names appear on the cheques, one a lifelong Republican, deny making a contribution. The suspicion is that Mr McDougal simply paid off Mr Clinton to protect Madison from state- appointed regulators.

The amount of money involved was small. The collapse of the US savings and loan industry in the 1980s cost the government dollars 140bn. Neither Mr Clinton nor Mr McDougal attended the Madison fundraiser. Even if the money ultimately came from Madison's depositors, there is no evidence that Mr Clinton knew about it.

But the story of the Clintons' relations with Mr McDougal - first exposed last March - has refused to die even though the White House insists there is no proof of wrongdoing. This is partly Mr Clinton's own fault. His grudging release of papers about the affair, particularly those taken from the office of White House counsel Vince Foster who committed suicide last July, has fuelled suspicions that he has something to hide.

Probably he does. But it is not likely to be the time bomb Republicans hope will damage Mr Clinton in the same way that the Iran-Contra scandal hurt President Ronald Reagan. Rather, the pretence by the Clintons that they were simply passive investors in Whitewater Development Corp - the property company they owned with Mr McDougal - has progressively collapsed. As with previous presidents they are finding that a botched cover-up can be more damaging than the original allegation.

When the rest of the media got bored with the affair last year the Republican right, led by the Washington Times, kept on digging. It discovered a letter from Hillary Clinton to Mr McDougal asking for full power of attorney over Whitewater which would allow her to run it. Mr Clinton's line of defence, that he had lost dollars 69,000 as a result of Whitewater, began to look thin when it was revealed he had not set the loss against taxes.

Cosy deals between politicians and businessmen are traditional in Little Rock but, even so, Mr Clinton's connection with Madison Guaranty seem to involve a particularly glaring conflict of interest. In 1984 a federal agency had already said the savings and loan was in jeopardy from 'unsafe and unsound lending practices'. In three years it lent dollars 17m to its directors and their friends. Despite this, Mr Clinton appointed an old friend of his, Beverly Basset, who had been Madison Guaranty's lawyer, to supervise her former client who was, in turn, Mr Clinton's business partner.

Even by Arkansan standards some of the mutual back scratching was spectacular. Jim Tucker, the state governor, owed Madison dollars 1m but got this reduced by 50 per cent. The father-in-law of Webb Hubbell, a law partner of Hillary Clinton and now associate attorney-general, borrowed dollars 600,000 and defaulted on repaying dollars 587,793. Mr Clinton, so far as it is known, did not benefit so dramatically but he acquiesced in Madison being used as a private piggy bank by needier members of the Little Rock establishment.

An excuse for Mr Clinton is that nobody at the time, from the federal government to the big accountancy firms, was doing much to regulate the savings and loans. Once sedate institutions which financed housing, they were largely freed from government control in the free-market enthusiasm of the early 1980s. The federal government still guaranteed depositors up to dollars 100,000 so they could pour money into a savings bank like Madison Guaranty and enjoy spectacular interest rates without any risk to themselves.

According to Martin Mayer, historian of the debacle: 'The theft from the taxpayer by the community that fattened on the growth of the savings and loan industry in the 1980s is the worst public scandal in American history.' The corruption was so gross that neither Republicans nor Democrats, both tarred by the scandal, dared exploit it as a political issue. Depositors did not mind what happened because they always got their money back.

Unfortunately for Mr Clinton the American political memory is short. Madison Guaranty, a small- scale enterprise, is suddenly the only savings and loan whose name anybody can remember. Mr Clinton's friendship with its owner, whose actions cost the government dollars 60m, looks less bad seen against the background of the collapse of whole savings bank industry.

The reason Arkansas was such a black hole for savings and loans - more went under in the state than anywhere else in the US - had little to do with Mr Clinton. A better explanation, is that the Federal Home Loan Bank Board, which supervised the savings and loans industry, was based in Little Rock until the early 1980s when it was transferred to Dallas. Many of its officers, well informed about the massive loopholes in the regulations which had just opened up, stayed in Little Rock to make money by starting their own savings and loans.

There was little Mr Clinton or any other governor could do about this. Nobody in Little Rock thinks Mr Clinton knew or cared much about business. A sign of this is his choice of Mr McDougal as a partner to develop 230 acres of land on the White river in northern Arkansas in 1978. 'You would have thought McDougal would have thrown out bad vibrations to anybody planning an investment,' says one Little Rock businessman.

The attraction may have been that Mr McDougal, who now lives in a mobile home on dollars 560 a month social security, was a politician as well as a businessman. He first met Mr Clinton when they both worked for Arkansas Senator William Fulbright. He had a history of mental breakdowns and alcoholism which grew worse after he was forced out of Madison Guaranty in 1986. He describes his trial for fraud four years later, at which he was found innocent, as an occasion which 'would do Stalin proud'.

The scandal surrounding Madison and Whitewater will probably dog Mr Clinton up to the next election in 1996. There are enough loose ends and disappearing documents - relevant microfilms melted when stored in an over-heated room - to prevent the affair ever being laid to rest. But just as he was a bad enough businessman to get involved with Whitewater, Mr Clinton was probably always a good enough politician to ensure that the exact nature of favours he did for Mr McDougal will never be known.

(Photograph omitted)

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