In The Line Of Fire

WITH THE EXCEPTION of his wife, Bill Clinton has no closer senior adviser than George Stephanopoulos. In the crucible of a turbulent 1992 campaign, Clinton came to depend heavily on Stephanopoulos's combination of razor intellect and political instinct. And in a world where proximity is power, the 33-year-old son of a Greek Orthodox priest holds forth in the work space closest to the president, adjoining the Oval Office through a private dining room.

Now it appears that Clinton's most trusted aide has joined the lengthening list of those caught up in the Whitewater scandal. Sources told NEWSWEEK and other news organizations that Stephanopoulos had two phone conversations last Feb. 25 that may constitute an attempt to obstruct a regulatory investigation of Madison Guaranty, the failed Arkansas S&L at the murky center of the affair. A detailed diary, kept by a Treasury Department aide and turned over to special counsel Robert Fiske, describes at least one of the conversations. Sources say that during the calls-one to Deputy Treasury Secretary Roger Altman, the other to Treasury chief of staff Joshua Steiner Stephanopoulos asked about the possibility of removing Jay Stephens, a prominent former Republican prosecutor hired by the Resolution Trust Corporation to investigate civil claims against Madison.

The latest revelations came only 36 hours after the president's most elaborate attempt yet to free his administration from Whitewater. In a prime-time news conference last Thursday, Clinton confidently affirmed a new willingness to answer all legitimate questions about the affair "so that I can go back to work doing what I was hired to do." But the allegations against Stephanopoulos brought the inquiries into the administration's conduct in Whitewater closer to the Oval Office than ever before-and plunged the White House back into a frenzy of damage control. Clinton's domestic agenda, already impeded by all the talk of cover-up and deceit, may now be in danger of stalling completely. To make matters worse, the widening scandal raised new tensions and mutual distrust among an embattled White House staff. "That's what is most upsetting, that people are attacking each other," says one worried adviser.

Until March 1993, Jay Stephens had been the U.S. attorney for the District of Columbia. He'd also been pursuing a criminal investigation of Rep. Dan Rostenkowski for alleged misuse of House funds. When the incoming Clinton administration sought the resignations of all incumbent U.S. attorneys, Stephens implied that he was being forced out to protect the powerful Ways and Means chairman. According to sources, Stephanopoulos was furious on Feb. 25, when he learned that Stephens's Washington firm had been hired for the Madison inquiry. He regarded Stephens's political grievance against Clinton as a clear conflict of interest.

The most potentially damaging of the two calls was to Steiner, an old friend from the campaign. Stephanopoulos acknowledges raising the issue with Steiner, but says he has no memory of inquiring about Stephens's ouster. "I was puzzled and blew off steam over the unfairness of the decision," Stephanopoulos told NEWSWEEK, but he added, "Once I got the facts from josh, that ended the matter as far as I was concerned." Much of the conversation, says Stephanopoulos, concerned Altman's decision to recuse himself from RTC deliberations involving Madison. Altman had been rebuked by Republicans on the Senate Banking Committee that week after acknowledging that he'd met with senior White House staff earlier that month to discuss potential civil actions against Madison. But Steiner, scheduled to testify before the Whitewater grand jury this week, may offer a different recollection of the conversation in a diary he turned over to Fiske.

That same day, according to sources, Stephanopoulos also raised the Stephens issue with Altman, who was also serving as acting head of RTC. This time, Stephanopoulos was joined by deputy chief of staff Harold Ickes. A knowledgeable source says either Stephanopoulos or Ickes it is not clear who asked about sacking Stephens. "Is there anything that can be done?" one of them reportedly asked Altman. Again, Stephanopoulos says he has no memory of such a question. Nor does Ickes.

The White House says Clinton learned of the phone calls only last Friday. News of the conversations, first reported last Saturday by The Washington Post, sent a new jolt of anxiety through the White House. New presidential counsel Lloyd Cutler said it was "perfectly natural" for officials to express surprise at Stephens's appointment, and cautioned against blowing the matter out of proportion. But he also took pains to distance the administration from the calls by Ickes and Stephanopoulos, saying that he didn't think they were "authorized" under White House policy. Other officials said privately that the two did nothing more than protest a flatly inappropriate hiring decision by RTC. "It's not like we don't like Republicans. Fiske is a Republican," says one senior adviser. "But this guy held a press conference to accuse Bill Clinton of a secret plot to get rid of him. "

Last week's events continued the White House's troubling pattern in Whitewater: denial followed by fragments of disclosure. Claims of openness are repeatedly tainted by evidence that it has actually been working harder to control and contain damaging information. Along with the phone calls, a cluster of other issues has turned scandal management into a full-time job at the White House. New ones may crop up; others may fade. But for the moment, these problems are driving Whitewater:

The release of the Clintons' long-withheld tax returns from the late '70s seemed to establish that they lost money on the Ozark vacation-home development they co-owned with S&L operator James McDougal. But it also provided details about Hillary Rodham Clinton's lucrative flier in the cattle-futures market (box). Although the deal is completely legal, it carries the whiff of hypocrisy for a couple that campaigned in 1992 against '80s greed-S&L abuses, insider trading, public officials who used their positions to enrich themselves. Her good for-tune came through a friendship with a lawyer for one of the state's largest and most influential employers.

The financial disclosures also evoked the least attractive aspect of Clinton's political personality: his facility for convenient evasion. Such a moment came at the Thursday-evening press conference, when he explained that he'd revised the estimate of his Whitewater losses downward (from about $70,000 to $50,000) because galleys of his mother's autobiography reminded him that $20,000 had actually gone to buy her a house. Accurate or not, it conjured memories of an earlier Clinton, one who suddenly remembered his induction notice.

The deputy treasury secretary keeps generating new suspicions about improper White House involvement in the Madison probe. Last week, he offered a fourth correction to congressional testimony on his contacts with the White House regarding the Madison investigation. He originally told the Senate Banking Committee that he remembered only one White House meeting-a "heads up" session to discuss nothing more than procedural questions about civil suits against the bank. Altman later amended his comments to include what he said were two brief hallway conversations with the then White House counsel Bernard Nussbaum and Ickes. Now Altman says the discussions were more extensive, and involved his desire to recuse himself from RTC investigations, which he did at the end of February.

Altman is also rapidly becoming a man without allies. Since Fiske's operation is regarded as "airtight," Clintonites suspect that the original leaks disclosing the two phone calls under investigation came from the Treasury Department. Their surmise only adds to tensions between Altman and the White House aides, building ever since he confessed the "heads up" session to the Senate and then publicly recused himself without informing Clinton aides.

The administration's new difficulties will further energize congressional Republicans who already smell blood. Until last week, the most visible face of GOP antagonism on Whitewater was Sen. Alfonse D'Amato, who has had his own ethical problems. That was before Rep. Jim Leach, an Iowa moderate who radiates 'Main Street Republican probity, took the House floor to make two dramatic charges: that the Clintons are not telling the truth about losing money in the Whitewater venture, and that the administration tampered with the investigation of Madison, owned by James McDougal, the Clinton's partner in the Whitewater land development. Federal investigators believe Madison accounts were drained by McDougal to subsidize other business interests, including Whitewater. Leach put up a fragile case for his first allegation. Using RTC documents, he notes $70,000 passed from Madison affiliates to Whitewater during one six-month period in 1985. But his thesis that the Clintons pocketed Madison cash is unproven.

He offered more disturbing evidence for his charge of political interference. His strongest exhibit was a sheaf of notes from Jean Lewis, the criminal investigator who led the Madison inquiry in RTC's Kansas City, Mo., office. She charged that superiors in Washington pressed her to ignore evidence that the Clintons' Whitewater venture played a significant role in draining Madison's accounts. Most telling was Lewis's account of a Feb. 2 meeting in which RTC attorney April Breslaw told her the agency was under pressure to conclude that Whitewater did not contribute to Madison's losses. "She felt like they wanted to be able to provide an 'honest answer'," Lewis quoted Breslaw, "but that there were certain answers that they would be happier about, because it would get them off the book."

According to her notes, Lewis told Breslaw she believed that the Clintons benefited from a check-kiting scheme that drew money from Madison into the foundering Whitewater development. She cited no evidence of the Clintons' complicity. But she wondered why they apparently asked no questions of McDougal, who assumed their interest payments on Whitewater land in the mid-1980s despite his own financial difficulties. "Wouldn't you question the source of the funds being used to your benefit?" Lewis asked. Breslaw has denied Lewis's account.

Special counsel Fiske, busy in Washington pursuing White House revelations, may have gained important ground in Arkansas when he cut a deal with former Little Rock municipal court Judge David Hale. Facing trial on fraud and conspiracy charges, Hale pleaded guilty, hoping for lenient sentencing in exchange for testimony on Whitewater. The agreement allows Fiske to question the one figure in the affair who directly accuses Clinton of wrongdoing. Hale, who ran a federally backed finance company, has charged that in 1986 Clinton pressured him to make a $300,000 loan to a firm owned by McDougal's wife: $110,000 was funneled to Whitewater. But Fiske has big credibility problems. A new General Accounting Office report on Capital Management Services, Hale's firm, shows he secretly owned 13 of the 57 companies to which he made loans.

The unending trickle of bad news has given way in the White House to a bleak acceptance that Whitewater is now a permanent part of the administration's political landscape. "The question is, can we continue to make progress with Whitewater as background music?" asks one senior official. For the moment, the answer is yes. Some issues still have constituencies that outstrip political problems caused by the scandal. Last week the outlines of a compromise on health reform began to emerge, and a major education initiative setting national academic guidelines passed the Senate.

Yet Whitewater is forcing the administration to work doubly hard for victories it should already have in hand. Clinton was counting on passage of the $22 billion crime bill before the press conference, to demonstrate that Whitewater has not swamped his legislative agenda. But White House lobbyists and Democratic congressional whips, consumed with staving off Whitewater hearings, allowed Republicans to gain the procedural advantage and deny Clinton a bill until after Easter. One top Republican strategist says continuing uncertainty about Whitewater will make it more difficult for Clinton to form majorities on a range of issues. "Because the question is, what's next and how low can he go?" he said. "People on the Hill will hedge their bets and they do that better than anyone." The bad news for the president-and the country-is that until the new questions get answers, all bets could be off.

The deputy treasury secretary oversaw the regulators investigating Madison Guaranty. At first he said he had one contact with White House officials. Then he admitted to another, then another, and another. There's no evidence Altman squelched the key investigation, but each changed story hurts his credibility. The good news is that he rebuffed Stephanopoulos's overheated inquiries about Jay Stephens.

The Clintons first said they lost $69,000 on Whitewater. Last week Clinton said it was $47,000. The difference matters little, if it was a loss. Representative Leach says the Clintons actually made money but has so far produced little proof. If he's right, the next question is far more serious: were the "profits" really a way for cronies to funnel funny money to Clinton? That would send the meter shooting to 6 or 7.