Muddy Waters

updated 01/24/1994 AT 01:00 AM EST

originally published 01/24/1994 AT 01:00 AM EST

PEOPLE IN ARKANSAS TALK ABOUT JAMES McDougal as if he were two different men. Some hometown pals still see him as the Duke of Bradford, a highflying Democrat who, during the 1980s, built a small savings and loan into one of the state's most well-connected institutions. Others describe a frail, chain-smoking recovering alcoholic who subsists on $723-a-month Social Security disability payments and who until quite recently lived outside Arkadelphia in a trailer.

Depressing though it may be, McDougal's fall—and the $47 million failure of his Madison Guaranty—would be drearily commonplace but for the fact that, in their heyday, McDougal and his then wife, Susan, were friends of Bill and Hillary Clinton's and formed a partnership with them in 1978 to develop 230 acres of vacation property in the Ozarks. The Clintons claim they lost nearly $70,000 in the Whitewater Development Corporation, but the eventual cost of their association with the McDougals could be much higher. Last week, after months of relentless Republican criticism, President Clinton asked Attorney General Janet Reno to appoint an independent prosecutor to look into the affair.

Questions about Whitewater have dogged the Clintons ever since reporters learned that a file on the project was taken from the office of deputy White House counsel Vincent Foster hours after he committed suicide last July. Even so, no one has suggested that the President or the First Lady did anything illegal. Indeed, in 1990, McDougal and two of his partners were acquitted in federal court of bank fraud and conspiracy charges.

But the special counsel will have to answer a number of lingering questions about the First Family's friendship with McDougal. In 1985, the banker hosted a cocktail party at Madison headquarters to help Gov. Clinton pay off a 150,000 campaign debt. At least one of the listed donors denies ever writing a check, and federal investigators wonder if McDougal used the event as a cover to funnel bank funds to Clinton. (Adding to the White House's embarrassment, Hillary represented Madison before Arkansas banking regulators in the mid-'80s, earning a $2,000 monthly retainer.) More important, investigators are trying to find out what happened to an undisclosed amount of money that went from Madison to While water, which built only six homes.

Friends say McDougal was always a shrewder politician than businessman. The son of feed-store owners in Bradford (pop. 874), he was "the best speechwriter I ever met," according to someone who knew McDougal in the mid-'60s, when the banker-to-be served as an aide to Arkansas' Sen. J. William Fulbrighl. It was then he befriended another young staffer, Bill Clinton. After that he started a company that gathered freshwater black mussels from the White River and sold the crushed shells for $500 a ton to Japanese firms that manufactured cultured pearls. In the mid-'70s, McDougal briefly taught political science at Arkadelphia's Ouachita Baptist College. In 1979, McDougal became Gov. Clinton's liaison to the State Economic Development Corporation. He bought the Madison bank in 1982 with a partner and embarked on a series of real estate development deals in which some of the state's most prominent Democrats were investors.

At the same time, Susan McDougal, who had been one of James's students at Ouachita, was raising eyebrows in Little Rock. During most of her marriage, Susan lived alone in a lavish home while her husband resided in a small apartment near his elderly mother. She helped market McDougal's real estate deals and once appeared in a TV commercial riding a white horse through a Madison property. In 1985 she took out a $300,000 loan—never repaid—that federal investigators suspect may have been improperly sunk into Whitewater.

The McDougals divorced in 1991, by which time Susan, now 38, had taken a job as personal assistant and bookkeeper to globe-trotting symphony conductor Zubin Mehta and his wife, Nancy. The Mehtas have filed a civil complaint against McDougal, saying she embezzled at least $188,000 from Nancy Mehta's bank accounts. "We discovered that she had been forging my wife's signature on hundreds of checks," says Zubin Mehta. McDougal's lawyer, Leonard Levine, says his client did nothing without her employers' consent.

Meanwhile, James McDougal denies any wrongdoing and predicts that any investigation will also clear the President's name. "Bill Clinton never did anything illegal that I know of—period," McDougal said recently. "And he never asked me to do anything illegal."

DAVID ELLIS
NINA BURLEIGH in Arkadelphia and bureau reports

From Our Partners