1986 Audit Cites Arkansas S&L Problems Now Focus of Probe
1986 Audit Cites Arkansas S&L Problems Now Focus of Probe
Jan. 10, 1994
WASHINGTON (AP) _ Nine months after Hillary Rodham Clinton's law firm told state regulators a troubled Arkansas thrift was heading for improvement, federal regulators warned that the institution was near insolvency because of risky land ventures and accounting irregularities, documents show.
A Little Rock lawyer who signed much of the correspondence said Sunday that the law firm was simply passing along the thrift's own assessment of its prospects.
A confidential March 1986 audit by the Federal Home Loan Bank Board also warned that Madison Guaranty Savings and Loan funds appeared to have been improperly diverted to projects and associates of the thrift's owner, James McDougal.
Eight years later, that allegation is a key focus of a widening federal probe into the thrift's failure that has now embroiled President and Mrs. Clinton.
Investigators are trying to determine whether the S&L's funds were used in the mid-1980s to pay Clinton's political debts, and whether Madison deposits were diverted to other entities controlled by McDougal, including Whitewater Development Corp., a real estate partnership the Clintons formed with McDougal and his then-wife.
The Clintons have repeatedly said there was nothing improper in their business dealings. And in an interview Friday with The Associated Press, McDougal supported the first family's position, saying the Clintons ''in no way benefited'' from his activities.
McDougal also emphatically defended his business record, saying Madison's funds were never diverted.
The 1986 audit, obtained by the AP, never mentions the Clintons or Whitewater. But it portrays Madison as financially reckless, rife with conflicts and on the brink of collapse.
''The problems discussed in this report (conflicts of interest, high-risk land developments, poor asset quality, rapid growth, inadequate income and net worth, low liquidity, securities speculation, excessive compensation, and poor records and controls), constitute a significant threat to the continued existence of the Institution,'' the 78-page report stated.
The tone of the report contrasts with the more reserved, sometimes optimistic assessment the Rose Law Firm had given state regulators a few months earlier.
At the time, Mrs. Clinton, through her firm, had been placed on a $2,000-a- month retainer by McDougal and was working to get the state to approve a novel stock issue plan to help recapitalize the thrift. Mrs. Clinton wrote a letter to convince state regulators the plan was legal.
Correspondence in the matter suggests Mrs. Clinton's role was limited, with most of the firm's work done by Rose associate Richard N. Massey.
The letters show the firm was aware in 1985 that Madison did not meet federally mandated cash reserve requirements.
But in a June 17, 1985, letter to state regulator Beverly Bassett, Massey suggested improvements were expected.
''The applicant anticipates that no deficiency will exist in the near future,'' Massey wrote - a key assurance since the state required the cash reserve limit be met as a condition for use of the recapitalization plan.
Though approved, the plan was never implemented, because Madison never met those FHLBB requirements.
Other Rose firm correspondence painted Madison in an optimistic light, saying the recapitalization plan would end shortfalls, and arguing that different accounting methods would improve Madison's financial standing.
''Madison anticipates that the proposed activities can only aid in the improvement of its financial condition and services provided to its customers,'' Massey wrote on July 25, 1985.
Massey, reached at home Sunday night, said the letter ''was not an endorsement'' of Madison's financial prospects but merely relayed the thrift management's assessment that was made in response to questions by state officials.
He said the firm had no other role in the proposed financial restructuring.
The Rose firm made no mention to the state of an earlier, 1984 FHLBB audit that warned risky land investments had greatly weakened the thrift.
''The viability of the institution is jeopardized through the institution's current investment and lending practices in real estate development projects,'' the 1984 audit stated.
The firm also relied on audits by the Frost accounting firm of Little Rock, which had pronounced Madison to be in relatively good financial shape. However, the FHLBB's 1986 report notes that Frost accountant James Alford, who signed the audit, had two loans with Madison, a situation regulators said could have jeopardized his impartiality.
The 1986 FHLBB report offered a grimmer assessment of Madison's prospects, detailing what it said were widespread abuses by the thrift and risky land deals ''for which the economic justification is questionable.''
The report also alleged McDougal was able to ''divert substantial amounts of funds from the projects to himself and others, who are considered to be insiders (relatives of Mr. McDougal, employees, relatives of employees and friends).''
Examiners were unable to probe many additional business ventures, the report said, because of shoddy record-keeping for projects under McDougal's control. The audit also concluded that accounting irregularities were making the thrift's books look better than they really were.
''Correcting entries will adversely affect net worth and result in an insolvent position,'' it said in a stark assessment.
Despite its perilous position, Madison remained open. McDougal was ousted from his thrift leadership role that year, remaining as owner. The institution failed in 1989 at a cost of $47 million to taxpayers.
In the interview, McDougal blamed the thrift's failure on his successors and regulators.
''It had a net worth of $22 million the day I left in July 1986,'' McDougal insisted.
McDougal also addressed the critical federal audits, saying that the same regulators were approving his plans to improve the thrift.
The current investigation has grown out of ''lies and misconceptions these irresponsible scriveners are printing,'' McDougal said.