The Unsinkable Scandal

EVEN AFTER THE MOST humiliating stretch of days in the Clinton presidency-after the parade of subpoenas, the forced resignation of the White House counsel, the Republican charges of cover-up, the spectacle of aides marching into the federal courthouse to deliver grand jury testimony-the White House still simmered in an angry state of denial for much of last week. The president delivered a podium-thumping defense of his First Lady ("I have never known a person with a stronger sense of right and wrong . . .") and then tried to soothe an East Room assemblage of aides with an excerpt of children's poetry from a book he once read to Chelsea.

The administration offered up a series of what it hoped would be agenda-shifting moves. Lloyd Cutler, 76-year-old Washington wise man and former Carter White House counsel, returned to his old post promising cooperation and disclosure on all fronts. Message merchant David Gergen, who had been oddly absent as Whitewater gained momentum (page 36), materialized on television to concede that matters could have been handled more efficiently but that the worst was over. Clinton also tried to turn the page. "Just tell them what happened," he said, when asked what advice he gave to aides preparing to appear before the grand jury. "Answer the questions and go on. Be very open."

But the initiatives all seemed to evaporate in a political environment edged with suspicion and paranoia. A rumor about the suicide of deputy White House counsel Vincent Foster, carried in an obscure newsletter, was picked up by Rush Limbaugh and sent the stock market tumbling (page 32). A six-inch, 1,000-page pile of White House documents, delivered to special counsel Robert Fiske under subpoena, only raised the possibility that numerous administration officials may have been inappropriately involved in a federal investigation of the failed Arkansas S&L. "We have done everything possible," complained one frustrated aide. "We agreed to a special counsel. We spent two days going through our trash. We submitted our top aides to the grand jury. What is there left for us to do?"

By the weekend, a counteroffensive began to emerge. It was led by the White House's most tenacious opponent of disclosure on Whitewater, Hillary Rodham Clinton. In an interview with NEWSWEEK (page 35), the First Lady offered a disciplined and high-minded reprise of the administration's line on Whitewater: that it was largely the product of an overcharged press, the culture of Washington and political enemies bent on distracting the administration from its agenda. But she also admitted that "I made mistakes," and conceded that her own excessive concern with secrecy ended up fueling speculation about wrongdoing. I really have been pulled kicking and screaming to the conclusion that if you choose to run for public office you give up any zone of privacy at all," she said. in the same vein, she acknowledged that the administration had erred in not being more forthcoming after the suicide of Foster, her friend and former law partner. Mrs. Clinton said that in the end, Foster's demise will be only the inexplicable tragedy of a man who took his own life. "When all the wild stories and rumors and innuendo are finished, we are going to be left as we were with Edwin Arlington Robinson's poem 'Richard Cory,' with an unanswered, very tragic question," she said.

On the substance of the Whitewater affair, however, Mrs. Clinton was unyielding in her position that neither she nor her husband is guilty of wrongdoing. Her only real misstep, she said, was a bad business decision made 16 years ago-investing in the ill-fated northern Arkansas vacation-home development. If she had it to do again, she said, "I never would have participated in the investment in the first place."

The First Lady's new engagement with the press, which probably will include a prime-time television appearance this week, is the White House's most dramatic signal yet that problems spawned by Whitewater have become impossible to ignore. There was mounting evidence last week that the affair is beginning to harm the administration. A NEWSWEEK Poll shows that only four in 10 Americans have a favorable opinion of either Bill or Hillary Clinton. A slim majority (52 percent) believe that the White House is concealing information that could be damaging to the Clintons.

On Capitol Hill, the Republicans labored overtime to deepen voter suspicions about Whitewater. "What did the president know, and when did Hillary tell him?" demanded New York Sen. Al D'Amato, whose own shaky ethical background-he was nearly ruined in the HUD scandals of several years ago-made him a dubious standard-bearer for the party's Whitewater crusade. The Republicans, belatedly realizing their tactical error, changed players. By the end of the week, Senate GOP leader Bob Dole had pushed Sen. William Cohen of Maine, clean-cut and press-friendly, out front.

On the House side, a "theme team" of Republicans, led by red-hot polemicists like Rep. Robert Doman, is mounting a daily barrage of charges and innuendo amplified by the conservative talk-radio circuit. With the 1994 midterm election cycle underway, the GOP's House and Senate campaign committees are turning Whitewater into a center-piece of their fund-raising drives. "There's no good news in Whitewater for the Democrats," says political analyst Charles Cook. One GOP gambit last week fell flat. Eighty-one Republican House members charged that Mrs. Clinton attempted to manipulate the value of health-care stocks while she chaired the presidential commission on health-care reform. The members' principal piece of evidence is Mrs. Clinton's holdings in a Little Rock investment partnership. They alleged that James McDougal and the First Lady benefited from sensitive financial information about the portfolio. But William Smith, the president of Smith Capital Management, said that McDougal had no interest in the partnership. "I've had zero contact with the McDougals. I've seen them on TV, but that's it." He added that the Clintons stopped receiving information on the partnership after March 1992. Their assets have since been placed in a blind trust. Smith, a Republican, is angry at what he says is a reckless partisan charge. "Here we have 81 U.S. representatives. They represent us. They're supposed to have some sense of justice," he said. "But they made not one phone call to check and see if their information might not be false."

Meanwhile, the White House still faces the inevitable prospect of congressional hearings on Whitewater. The NEWSWEEK Poll shows that a small majority of the public-52 percent-would like to see them. Fiske secured a partial victory last week, when Senate GOP leaders agreed to hold off until after June 1, giving him time to wrap up at least the White House phase of his investigation. But the administration faces the immediate problem posed by the House Banking Committee, where Republicans want to turn next week's routine bearing on savings and loan regulation into a Whitewater forum. The panel's ranking minority member, Rep. Jim Leach, released a list of 40 potential witnesses that reads like a who's who of Whitewater, from James and Susan McDougal to a Rose Law Firm courier who alleged last week that documents belonging to Vincent Foster were destroyed after Fiske had announced that he would be reviewing Foster's death.

Leach will face a fight from Democratic Banking chairman Henry Gonzalez, who will attempt to bar Whitewater questions. But if the hearing does come off, it could raise new questions about political interference in the federal investigation of Madison Guaranty. Leach charged last week that investigators in the Resolution Trust Corporation (RTC) were "gagged and possibly coerced" by agency lawyers who wanted to delete mention of the Clintons from documents recommending the Madison case to the Justice Department for possible criminal action. Leach refused to elaborate. But NEWSWEEK has learned that Jean Lewis, a criminal investigator in the RTC's Kansas City, Mo., field office, is expected to offer detailed testimony about her disputes with agency officials.

Lewis, who would not return phone calls last week, is a key figure in the Madison investigation. The story begins in 1990, when McDougal was acquitted on federal bank-fraud charges that grew out of Madison's 1989 failure. At that point the RTC-created by the Bush administration to recover federally insured deposits lost by insolvent S&Ls-had virtually written off any further criminal investigation of Madison. But in March 1992, The New York Times published its account of McDougal's relationship with the Clintons, which included the ill-fated Whitewater partnership. The story's implication was that McDougal had offered the politically powerful couple a sweetheart land deal in exchange for favorable regulatory treatment for his banking interests. The RTC decided to have another look, and put Lewis in charge of the renewed investigation.

By the summer of 1992, according to sources, the RTC's Kansas City office had compiled a 21-page report targeting McDougal and his wife, Susan, for criminal investigation. Agency sources say that the Clintons were not named as investigative targets, but were nevertheless mentioned as potential beneficiaries of possible illegal acts by the McDougals, including the draining of Madison accounts. A summary of the report reached top officials at the Justice Department in early October 1992, but the Bush administration-already under fire for charges that State Department officials had tampered with Clinton's passport file-elected to ignore a matter bound to cause more trouble on the eve of a presidential election.

The case sat in the justice Department's criminal division through the transition to the Clinton administration. In March 1993, attorneys concluded that the matter did not warrant investigation, but left the final decision to federal prosecutors in Little Rock, who quickly concurred. But it was several months before the RTC investigators in Kansas City learned of Justice's decision to bounce the referral. In the interim, an RTC source says, Lewis and others continued to gather information for a new, expanded criminal referral.

This time, according to congressional and RTC sources, Lewis had collected information suggesting that the Whitewater land venture--co-owned by the McDougals and the Clintons-may have contributed to Madison's eventual failure. Congressional source say Lewis encountered resistance from the RTC attorney reviewing the referral and that she believes it may have been the result of outside pressure. Sources say the new referral, passed to the Justice Department in September 1993, again mentions the Clintons as potential beneficiaries of McDougal's activities.

But sources say that the debate within the RTC became so heated that both Lewis and the agency attorney involved were removed from the case. Sources familiar with the RTC's Kansas City office say her reassignment came in November 1993. That would put it shortly after a series of White House contacts with Treasury Department officials regarding the Madison probe now under investigation by Fiske.

Right now, evidence of political interference is strictly circumstantial. The RTC turmoil may be attributable to honest disagreements among bureaucrats. If Leach doesn't deliver credible witnesses, it will only deepen voter suspicions that the whole affair is primarily partisan blood sport. The NEWSWEEK Poll shows that 64 percent of Americans believe that politics are driving Whitewater. Nearly three quarters think the White House's preoccupation with the case is diverting attention from important issues like health-care and welfare reform. "What scares me is that we're going to put all our hopes into destroying the president," says GOP polltaker Frank Luntz. "Republicans won't benefit unless they're seen as offering something better."

But the White House has a long way to go before it can get itself heard again. For the short term, the administration faces a seriously diminished capacity to pursue its agenda. Subpoenas, nightly news footage of senior officials marching to the grand jury room and the probability of congressional hearings all stand in the way. For too long, it regarded Whitewater as a minor irritant. Now it will pay the price for that shortsightedness.

_B_NEWSWEEK POLL_b_ Is the Clinton administration knowingly covering up information about Whitewater that could be damaging to the president or Hillary Clinton? 52% Covering up 29% Not covering up THE NEWSWEEK POLL, MARCH 11, 1994

< b>WHITEWATER METER

This week, NEWSWEEK Installs a meter to help gauge Whitewater rushing by. What looks trivial now may look criminal later-and vice versa:

Shredding at law firms is routine. And the Rose Law Firm shredders say they saw nothing about Whitewater In the old documents they say belonged to Vincent Foster. Plus, it seems unlikely that in a genuine cover-up a 20-year-old courier would be enlisted to destroy evidence. But given Foster's suicide, why were any of his files destroyed? Anonymous sources claim that Hillary Clinton herself ordered shredding in 1992. If she did, the meter will move.

Two briefings were merely improper; one looks like something worse. On Sept. 29, 1993, Treasury general counsel Jean Hanson told White House counsel Bernard Nussbaum that the Clintons would be named as beneficiaries of possible Illegal activity at Madison Guaranty S&L Unlike the later meetings, that early heads-up suggests political involvement in a legal proceeding. But there's no evidence right now that the White House tried to Mock a probe.

This one looks like pure partisanship. Although the Clintons should have put their holdings Into a blind trust earlier, It's hard to imagine that Hillary know one of her investment funds was selling a law health-care stocks short before her attack on drug companies. Besides, the fund lost more on health stocks it held. Lawmakers making a stink routinely vote on health issues without divesting.

_B_NEWSWEEK POLL_b_ Who is most responsible for the problems the White House has had dealing with the Whitewater case? 14% Bill Clinton 12% Hillary Clinton 11% Administration aides 14% Partisan Republicans 25% The media THE NEWSWEEK POLL, MARCH 11, 1994