FRONTLINE TRANSCRIPT

"Once Upon a Time in Arkansas"

Air date: October 7, 1997

PETER BOYER: Once upon a time in Arkansas, a local wheeler-dealer had a vision and he decided to chase it. He would involve his political friends. He'd require some artful legal maneuvering, involving oneof the state's most notable law firms. This compelling idea centered on a spread of land outside of Little Rock. Hundreds of working-class families would get a chance to own their own homes and our dreamer and his political friends could make some money. The project was called Castle Grande. But the dream went badly wrong and a circle of friends -- some of Arkansas's best and brightest --would find themselves ensnared by scandal. Four have gone to prison, one is dead by his own hand and two live in the White House.

TITLE: "ONCE UPON A TIME IN ARKANASAS"

It had never happened before. Hillary Rodham Clinton, the only First Lady ever subpoenaed before a grand jury, has just testified for hours.

HILLARY CLINTON: Well, you're all still here, I see.

PETER BOYER: Prosecutors want to know whether she or her husband -- the president -- have committed perjury and whether she has obstructed justice.

REPORTER: Would you rather have been somewhere else today?

HILLARY CLINTON: Oh, about a million other places today, indeed. But now I am going home and I hope all of you will, as well. Thank you.

PETER BOYER: The questions pose the Clintons' place in history. The answers lie in what happened in the aftermath of that long-ago dream called Castle Grande. Lord knows, we all think we know enough about the Arkansas scandals that have come to be called Whitewater. But to really understand it all, you have to understand the particular rhythms of this very particular place, its business and political folkways.

I've been coming back here to Little Rock over the years to find out how an old political culture has shaped a new generation of Arkansas elites. They were friends and their friendship fostered actions and obfuscation that prosecutors may indeed find criminal. Now, with the independent counsel weighing indictments, we're trying to piece together what it is he thinks the president, the First Lady and many of their friends may have done. But I'm getting ahead of myself.

The story begins in small-town Arkansas, where friendship is the currency of daily life, like a place called Hope, where a group of local boys grew up to run America.

DAVID WATKINS, Former White House Official: I guess I could jokingly say it's in the water, or in the watermelons that we eat in Hope. But when we first got to the White House, Vince Foster, Mac McLarty and I were talking one day and they could-- if you counted the president as a senior official, 20 percent of the senior officials in the White House were from Hope, Arkansas.

PETER BOYER: Up north in Bradford, another son of small-town Arkansas, Jim McDougal, was growing up.

JIM McDOUGAL: This is a town of 600. In towns of that size, you have a town drunk, the village idiot and th town Republican. And the town Republican, he kidded me about being a Democrat.

PETER BOYER: Like many folks in the post-Depression South, Jim's family revered Franklin Delano Roosevelt--

PRES. FRANKLIN DELANO ROOSEVELT: There is a mysterious cycle in human events--

PETER BOYER: --a reverence they passed on to their precocious child, who memorized all the historic FDR speeches.

PRES. FRANKLIN DELANO ROOSEVELT: To some generations much is given--

JIM McDOUGAL: --"of other generations"--

PRES. FRANKLIN DELANO ROOSEVELT: --of other generations--

JIM McDOUGAL: --"much is expected."

PRES. FRANKLIN DELANO ROOSEVELT: --much is expected.

JIM McDOUGAL: "This generation of Americans has a rendezvous with destiny."

PRES. FRANKLIN DELANO ROOSEVELT: --has a rendezvous with destiny.

PETER BOYER: Jim McDougal's destiny would someday be found at the intersection of politics and money, where he began a fateful association with a young Bill Clinton. Politics was Jim McDougal's muse. He worked in the legislature as a teenager. In his 20s he was running campaigns for legendary Arkansas Senator William Fulbright. Eventually, he was drawn to the campus of a small Baptist college that was the intellectual epicenter of political Arkansas.

CLAUDIA RILEY: It's a small enough state that if you are integrally involved in the process, you begin to know everyone.

PETER BOYER: Claudia Riley is the widow of one of Arkansas's towering political figures, professor and former governor Bob Riley. Their home in Arkadelphia became a gathering place for the marquee Democrats of the time.

CLAUDIA RILEY: Like a little gathering of eagles, (laughs) you know, they were all here-- Senator William Fulbright--

Sen. WILLIAM FULBRIGHT, (D), AK: I don't mean to suggest, of course, that I now agree with the course of action we are following in Vietnam--

CLAUDIA RILEY: --George McGovern--

Sen. GEORGE McGOVERN, (D), SD: They make war and they call it peace--

CLAUDIA RILEY: --Jimmy Carter--

Pres. JIMMY CARTER: And we share with you the commitment of freedom, self-government and the peaceful resolution of disputes.

PETER BOYER: And the Rileys also attracted the new generation of rising political stars.

CLAUDIA RILEY: There was Bill Clinton, Jim Guy Tucker. McDougal was always there with them. And, of course, Jim McDougal was a friend of Bill Clinton's, I think a very close friend.

PETER BOYER: The young Jim McDougal, who'd never really left Arkansas, loved the gossip and buzz of the backstage. Bill Clinton, home from Georgetown and Oxford, was drawn to the spotlight. His natural political allure was almost palpable. One member of that Riley political salon, Paul Fray, met Bill Clinton and was thunderstruck.

PAUL FRAY, Clinton Campaign Manager, 1974: I said, "I have finally met the boy that I know is going to make the next United States Senator from Arkansas, whenever he comes of age." You know, I did that in the second day that I had met the man. I knew that he had what it took to make it happen. He was best man at my wedding. He and I became that close. Yeah, I considered him as good a friend as I've ever had in my lifetime.

PETER BOYER: Jim McDougal, meanwhile, stayed close to political dean Bob Riley, trying his hand at teaching politics. The young professor had an audacious nature.

SUSAN McDOUGAL: One of my funny stories about him was I lost the key to the office, so I went to McDougal and I said, "I've lost the key to the office. I can't get in." He says, "No problem. I'll handle it." And I thought, "Oh, this is-- this is great." So he walks promptly over to the door and kicks it down, kicks it down off of the-- you know, out of the frame, onto the floor. And I thought-- I thought, "Oh, my God." But you know, it's the story of my life with Jim.

PETER BOYER: Susan Henley married Jim McDougal. He was a divorced professor. She was 15 years his junior. Bill Clinton attended the wedding. The young woman he had married came as a surprise to the Arkansas crowd.

PAUL FRAY: I never figured that Bill Clinton would bring a person to Arkansas that did not fit somewhat the mold. And she didn't. I mean, you know, when I first met her, I thought, "Oh, my gracious. This girl's a hippie," or you know, something like that.

CLAUDIA RILEY: This is going to be-- this is a touchy thing for me, the Hillary-Bill thing. And I think that you can-- you can read-- and he's-- you can ask me whatever you want, I'll handle it, but he is so charming and so outgoing and Hillary was-- all those years was so pulled-in. She saw the potential in Bill Clinton and she was going to take his future and mold it. His destiny was in her hands. I believe this with all my heart and soul, that Bill-- Bill is pretty laid back. I mean, he's ambitious, but I don't think he ever thought he was going to be elected to the presidency. I don't think-- I think it was the biggest surprise for him of anybody.

PETER BOYER: With Hillary at his side, Bill Clinton was ready for his first test with voters: running for Congress in 1974.

DAVID WATKINS: I was so impressed with the way he dealt with people, the way he was one-on-one. And he's the greatest seducer I've ever met. And he, through his manners and through his one-on-one ability, he seduced me sometime a long time ago.

PETER BOYER: He lost his race for Congress, but ran for attorney general and won. Jim McDougal didn't have that particular talent to seduce voters. He set his sights on making money.

JIM McDOUGAL: Offices then paid nothing. When I grew up, the governor paid $10,000 and you simply had to have something else to make a living. Politics was seen as an avocation, as something you do to pass the time.

PETER BOYER: So Jim turned his hand to land developing-- "dirt dealing," as they say in Arkansas. Susan's brother, Bill, worked for Jim.

BILL HENLEY, Former McDougal Associate: It's a very small state, limited population. Everybody knows just about everybody else. I think Jim McDougal was a master of the art of the deal. He wanted to make deals and he wanted them to work and he was willing to include anyone and everyone that was close to him.

PETER BOYER: And the people close to him were politicians.

SUSAN McDOUGAL: We literally had no friends. On a Sunday, we would sit at home and look at each other and we would say, "You want to go to a movie?" "No." "Well, let's go see Jim Guy." You know, we'd go by Jim Guy's house and have lunch and then we'd pop over to Bill Clinton's house, because it was the only friends that Jim had. And I say that because, in terms of friends, Jim had to be on top somehow. He had to be in control. And to control that friendship had to be the business deal involved.

PETER BOYER: He made them partners in his deals and used their stature to make it easier for banks to say yes. And the politicians, like his friend, Bill Clinton-- well, they were happy to go along.

JIM McDOUGAL: You do that like you'd say, to use the golf analogy, "Hey, come on and play a round of golf with us." You'd say to Bill, "You want to make some money? We got a deal. You'll make some money. Come on!"

BILL HENLEY: He had it all under control. He had the plan from the beginning to the end. All they had to do was sign the papers and that's what Bill and Hillary did, they signed the papers. And then the association, the friendship, the business relationship is what Jim McDougal wanted from it.

PETER BOYER: And that's how they got involved in that vacation property on the White River that Susan named "Whitewater."

JIM McDOUGAL: That was spur of the moment. I think Susan and I ran into the Clintons as we were in the process of buying it and said, "Hey, you want to do this deal with us?" I said, "What have we got to do?"

PETER BOYER: They didn't have to do much. McDougal arranged a loan and all they had to do was sign it and then wait for the boom in Ozark vacation homes. Bank officer Don Denton approved the loan.

DON DENTON, Former Madison Guaranty Loan Officer: The transaction was presented to me by a lobbyist who worked for the Union Bank. And at that time, the joint backer was to be Bill Clinton, who had a very modest income and no substantial assets.

PETER BOYER: Was there a time, as a bank officer, when you had to sit down and assess the pros and cons of making this transaction?

DON DENTON: It was described that Bill Clinton was an up-and-rising star in Arkansas. It would be good business for the bank to accommodate the attorney general. There was talk around town at the time that he was contemplating a run for the governorship.

PETER BOYER: By 1979, Bill and Hillary were living in the governor's mansion and others in the Clinton crowd were also taking their places in the Arkansas establishment.

Over at the venerable Rose law firm, Hillary Rodham was something new and a couple of rising young attorneys, Webb Hubbell and Vince Foster, welcomed her as a breath of fresh air. The three of them became fast pals. They were part of a crowd, the Arkansas yuppies who lived in the fashionable neighborhood and visited at the country club. Jim and Susan McDougal weren't part of that world. McDougal had decided to become a banker. To start his new career, he went back to the kind of town he grew up in. He went to Kingston, Arkansas. Kingston is a town of about 400 souls three hours northwest of Little Rock. McDougal would use the town folks' deposits to leverage deals all over Arkansas, especially political deals.

PAUL FRAY: Bankers do control the political process. I don't care what you say about Arkansas, that's one, you know, constant, static, number one linchpin of the whole process, so if you can't be a kingpin, you'd best be knowing one. And that's why that he took it upon himself to get into the banking business, because he knew that those people controlled the cash-flow question. You know, he realized that that's the way the game is played. Very simple.

PETER BOYER: And from his new base in Kingston, McDougal played Arkansas-style politics, now as a power broker.

SUSAN McDOUGAL: The fun thing about politics with McDougal was that you never were at the parties or the gatherings or anything, you were in the back room with the guys who are really doing things, you know, and that was fun to me. I met all the old pols in Arkansas, you know, the guys who smoked cigars and sat and talked about, you know, the real things that were going on.

PETER BOYER: But already Jim McDougal's business dealings and his own special style of management was attracting the attention of bank examiners [interviewing] What kind of bank did he run?

DON DENTON: Very sloppy, very poorly managed, made a lot of "buddy loans" or loans to friends, business associates. The bank very quickly got into financial trouble.

JIM McDOUGAL: My politics was dictating my business practice then and causing me, really, through my idealism on that, to do some very dumb things because I was wandering into a field I did not understand.

PETER BOYER: Such as? Help me to understand that.

JIM McDOUGAL: Banking-- well I didn't really understand the intricacies of banking.

PETER BOYER: The Kingston bank was in trouble. Examiners were hounding him and Jim McDougal doubled his bet. He bought a savings and loan, moved it to Little Rock and named it Madison Guaranty. Susan remodeled the building in the Art Deco style. It was a perfect fit. In the '80s, the possibilities for an S&L were limited only by the daring of the operator.

DON DENTON: Jim was always wound up. There was a new deal every day.

PETER BOYER: McDougal even talked former bank examiner Don Denton into joining him.

DON DENTON: We'd go to lunch and Jim would tell me a new deal and I was shocked and I just kind of backed up and explained to Jim, "You can't do this in a financial institution. This doesn't make any sense. The regulators will come unglued." And McDougal grinned with all his confidence, explained that, "Hey, Denton, this is a candy store. This is not a commercial bank."

PETER BOYER: One day Bill Clinton jogged over to Jim McDougal's bank.

JIM McDOUGAL: Bill had been jogging and it was warm weather and he was perspiring and he sat down in the chair. And after he had been there 30 minutes and got up and left, the outline of Bill Clinton was in salt on my new chair.

PETER BOYER: He came to ask for some help for his wife.

JIM McDOUGAL: I said, "Yeah. Sure. We'll give Hillary some of this legal work." And it was probably 6:30 in the morning and within a couple of hours, she came by and we talked a little bit and agreed to put her on retainer at $2,000 a month.

PETER BOYER: So Hillary became a McDougal lawyer. McDougal had a grand design: use his S&L to pay for his dirt dealing. He started buying up thousands of acres of land south of Little Rock. His biggest deal was here, "Castle Grande." The idea was simple. Cut half-acre plots out of the scrub pine, plant a double- wide trailer on it and charge 3 percent down.

JIM McDOUGAL: Or they could do a certain amount of work themselves, which counted as "sweat equity," and get in with nothing down. And so this had a tremendous appeal to me.

PETER BOYER: He cast it as FDR populism: low-cost housing for the masses. But he had a problem. It was against the law for him to use money from Madison Guaranty to finance the entire project. To make it all happen, he had to employ creative financing. But the auditors would catch up with him. Here's what they found. McDougal needed nearly $2 million to buy the land, so he lent this man -- Seth Ward -- $1.15 million dollars to buy the land on his behalf.

DON DENTON: The state regulation prohibited him from simply buying all of the land to start with. So Seth's involvement was a tool that McDougal attempted to use to legalize the transaction.

PETER BOYER: But by now bank examiners were taking an ominous interest in Madison Guaranty. McDougal had to hide the dubious loan to his straw man, Seth Ward, so he concocted a complicated series of deals rooted in a transaction that came to be called "the Dean Paul loan." Dean Paul was a local businessman. McDougal offered to lend Paul $825,000 to buy some land from a local judge, David Hale. But the money never went to Paul. It went straight to Judge Hale.

[interviewing] You knew intimately well the details of this so-called "Dean Paul loan."

DON DENTON: Yes.

PETER BOYER: Did anything about it cause you concern?

DON DENTON: Yes.

PETER BOYER: And you convey them to whom?

DON DENTON: McDougal.

PETER BOYER: What did he say?

DON DENTON: I recall rather specifically McDougal said, "I didn't ask you what you thought about the loan, I asked you to close it. Get it closed and shut up."

PETER BOYER: Then McDougal involved some of his political friends in the scheme. Judge Hale lent some of the Dean Paul money to former Congressman Jim Guy Tucker and to another close McDougal friend, R.D. Randolph. McDougal loaned more money to his old mentor, Senator Fulbright. Together Tucker, Randolph and Fulbright then bought out Seth Ward's share of Castle Grande. The dubious loan was off the books.

McDougal designed it to be complicated and he succeeded. To disguise a questionable loan, McDougal created a number of complex and supposedly separate financial transactions with his friends. In reality, he was simply moving the same money around in a circle.

[interviewing] As you know, it came to be-- this transaction, which I have called "circular," came to be referred to by federal regulators as, on its face, being a sham deal. Was it?

DON DENTON: I have understood that regulators refer to it that way, yes.

PETER BOYER: Do you recognize it on its face as being a sham deal?

DON DENTON: I hesitate to respond to that. I'm not sure what a "sham deal" means.

PETER BOYER: A deal constructed and designed specifically with the purpose of getting around regulatory limitations.

DON DENTON: I think that would probably-- if that is the definition of "sham," I think that would fit. This particular transaction would fit that definition.

PETER BOYER: The deal had all manner of benefits for the McDougals. Judge Hale ran a side business that passed out grants from the Small Business Administration in Washington. Hale took some of the cash from the Dean Paul loan, matched it with more from the SBA and gave $300,000 to Susan, who had applied under a special grant for minorities and women. She said she wanted to open an ad agency. Actually, it went straight into the McDougals' bank accounts. Then the auditors uncovered it all and Jim McDougal's world began to come apart.

SUSAN McDOUGAL: Our separation came the day that Jim told me, he said, "You are no fun. You are really getting to be a drag." And I could see that he wasn't listening to me anymore. And Madison was out of control. There wasn't anyone there who had any sense who wasn't worried and everyone was coming to me and saying, "What do we do? Jim is saying this. Jim is telling me to do that." And I was the control. And after I left, it only was worse.

PETER BOYER: And then the Federal Home Loan bank board told Jim McDougal he could no longer run Madison Guaranty. McDougal lost his house, his Jaguar and Susan. And then he had a stroke.

CLAUDIA RILEY: And he came here to be with us. He brought his worldly possessions with him and a cat and a Piggly Wiggly sack and, I think, sleeping garments and shaving equipment. And Jim was here with us, not to return to Little Rock. This was a fallen man.

PETER BOYER: And then McDougal was put on trial for fraud. More than $60 million dollars had been lost at Madison Guaranty. Jim McDougal had hit bottom.

JIM McDOUGAL: I was so depressed, so ashamed to be accused of a crime, so worried about the effect it was having on my aged mother. But some miracle occurred when I got on the stand. The prosecution had written out to 280-some questions to ask me, but I was able to send them into a complete rout after about 20 minutes and was allowed to step down and I'm still absolutely astonished. When they read the verdict "not guilty," I was the most surprised man in the state of Arkansas.

PETER BOYER: By all accounts, it was a bravura performance, Jim McDougal as the populist, appealing to the jury. He was a free man. Acquittal brought McDougal a genuine thread of hope, the prospect of personal redemption. He was broke, but he still had friends, powerful friends in a position to help. One of them, Bill Clinton, even promised that he would.

SUSAN McDOUGAL: He did call and ask how Jim was doing and I told him he was doing better. And I said, "You know, a good thing to do would be to call Jim's mother." She was very ill and she loved Bill very much. And he did call Jim's mother and in a conversation with Jim's mother, said -- and I wasn't there, but from what I understand -- that he would help Jim.

CLAUDIA RILEY: Jim didn't talk about this to us, but his mother was living at the time and she did, and she said that Jim was going to go back to work with the governor and she said it repeatedly. And that was her hope and her dream because she thought that was-- she loved Bill Clinton.

JIM McDOUGAL: And he called her up and he said, "Well, I think I've got something for Jim to do."

CLAUDIA RILEY: So she was banking heavily on that. He was her only child and she thought that would be-- "This is going to be marvelous."

JIM McDOUGAL: Every day for the next year or whatever, Mother would say, "Have you heard from Bill? Has Bill called you about a job?" And of course Bill hadn't called me.

SUSAN McDOUGAL: That would've been extremely embarrassing, to have to face his mother and for nothing to have happened.

PETER BOYER: Eventually, Bill Clinton did call McDougal, who was here in the Rileys' living room. It was not the call McDougal had been waiting for. For one thing, Hillary was on the line, too. And the governor didn't say anything about a job for Jim. But he did ask for money.

JIM McDOUGAL: The real purpose of the call was to get some money in connection with Whitewater. But obviously, Hillary was on the extension, prompting him. And it was very awkward for him. I really-- although I became quite angry, about the context of the conversation, I felt quite sorry for him because it was so belittling. But he called up to ask for $3,000.

PETER BOYER: It seems that there were some unpaid bills on Whitewater, some tax costs.

CLAUDIA RILEY: Something changed in Jim at that time, a quietness, a retreat.

PETER BOYER: Alone and friendless, McDougal retreated to a trailer house on the Riley property.

BILL HENLEY: Total seclusion. He would sit in his apartment in the dark, one chair in the middle of the room, cigarettes in one-- on one side and his favorite candy on the other. And he would not move and he would not open the door and he wouldn't answer the telephone. And he would brood and watch television.

Gov. BILL CLINTON: And that is why today I proudly announce my candidacy for president of the United States of America.

PETER BOYER: Bill Clinton, meanwhile, was drawing nearer to his dream, a campaign, as we remember, that was marked by some unwelcome Arkansas memories.

GENNIFER FLOWERS: The truth is I loved him.

PETER BOYER: A former lover emerged--

REPORTER: What's your relationship with Gennifer Flowers?

BILL CLINTON: There really isn't one, obviously.

PETER BOYER: --questions about how he avoided serving his country in Vietnam--

BILL CLINTON: I certainly didn't know what my number would be or whether I would be called. That is clear. I put myself into the draft.

PETER BOYER: --even that Whitewater deal with Jim McDougal. "The New York Times" was asking questions about Hillary's ties to McDougal. Over at the Rose law firm, her friends, Webb Hubbell and Vince Foster, undertook a preemptive examination of that relationship. Hillary had destroyed her Madison records back in 1988, but there remained some billing records on the computer, which they printed out for the campaign. And then these records disappeared. But Clinton prevailed. Arkansas shared the triumph.

CLAUDIA RILEY: It was a really wonderful moment for us, for my husband, in particular.

PETER BOYER: Jim was down in the trailer?

CLAUDIA RILEY: Uh-huh. Uh-huh.

PETER BOYER: Watching his friend Bill Clinton get elected president? The president-elect and Mrs. Clinton had their friends to thank.

DAVID WATKINS: I was one of the very few people back in sort of the staging area before the Clintons came out on the stage and when he first saw me, he came up to me and hugged me and put his arms around me and said, "Well, David, I want you to know I couldn't have done it without you-- for many years. This is not just this time, but for many times." And that, you know-- shoot, that was a big deal to me. It's still a big deal.

PETER BOYER: The new first couple surrounded themselves with trusted friends: Mac McLarty from Hope, chief of staff; another Hope boy, Vince Foster, to the White House as deputy counsel and minder of Clinton files; Webb Hubbell went to the Justice Department and David Watkins would run the White House day to day.

DAVID WATKINS: I think they needed trusted aides, people that he knew back and had a feel good for, that had had shown before an amount of loyalty and support for him and had been in his foxhole.

PETER BOYER: But as we all know, the morning after was painful for the Arkansans-- a chorus of complaints on the airwaves of America--

RADIO TALK SHOW HOST: This man has absolutely no convictions, no principles--

CALLER: Lee Harvey Oswald, where are you?

PETER BOYER: --reports of domestic unrest in the private quarters, "Travelgate," "Nannygate."

SUSAN McDOUGAL: I remember very well Jim looking at me one day and saying, "I don't think they're having very much fun up there, do you?" talking about the Clintons being in the White House and especially bitter that they might be having a good time and happy that they weren't.

PETER BOYER: The Clinton White House seemed to turn in on itself and even the comforting bonds between that trusted group of Arkansans began to fray. The pressure was most keenly felt by Vince Foster.

DAVID WATKINS: The pressure was horrendous, much more so on Vince and probably the type of person that he was, probably more than anybody else in the White House.

PETER BOYER: He had cast himself in an impossible role, as Hillary's protector, and the more events careened beyond control, the harder he tried to contain them. His journal entries on the "Travelgate" affair reveal a meticulous legal mind nearing the point of obsession. Over and over, he scrawled out a line of defense, Hillary's defense. And in the background always was the shadow of Whitewater. It all took a toll on Foster. His wife and friends sensed his gathering despair.

ILEENE WATKINS: I mean, Lisa shared some things with me, that, you know, how disturbed he was. And I don't know if it was right to say exactly how she shared it, but he was under more stress than I can imagine any man being. I mean he was showing great signs that--- she did, she said, "Vince wants me to hold him in bed at night." I mean that just-- it's something that is hard for me to discuss. It is-- if you don't understand that, you just don't get it.

PETER BOYER: Vince Foster's suicide had an unexpected consequence. It brought Whitewater back to life because it was learned that Foster had been handling Whitewater for the first family.

VIET DINH, Former Federal Investigator: Vince Foster actually played a significant role in acting as the Clintons' personal lawyer, rather than as a deputy White House counsel representing the President.

PETER BOYER: Viet Dinh was a lead investigator for the Senate Whitewater Committee. His assignment: What happened to the Clintons' Whitewater files in Vince Foster's office?

VIET DINH: We will never know, I don't think, what records were in Mr. Foster's office at the time of his death.

PETER BOYER: The Clintons' personal files were removed from Foster's office before investigators could review them. They were moved temporarily to a closet in the private quarters of the White House. Whitewater became a national mystery. Then, two years later, in early 1996, a long-missing piece of evidence suddenly appeared here in the First Lady's book room, just across the hall from that closet-- the billing records from the Rose law firm, the documents Webb Hubbell and Vince Foster reviewed back in the 1992 campaign.

This is what they say: that as a lawyer, Hillary Clinton did some work on a big land deal, a dirt deal Jim McDougal did once upon a time in Arkansas. Remember that sham deal created by Jim McDougal to buy Castle Grande with Seth Ward? Seth Ward's son-in-law is Webb Hubbell. Hubbell accompanied the Clintons to Washington and later would go to prison for fraud. Hillary Clinton worked with Hubbell at the Rose law firm and one of her clients was Jim McDougal's savings and loan.

Those long-missing billing records indicate that over a 15-month period, Mrs. Clinton billed McDougal for some 60 hours of work, half of it on Castle Grande matters, including a dozen conferences with Seth Ward, who was described by federal regulators as a straw man in the Castle Grande deal. According to the billing records, Hillary Clinton wrote an agreement between McDougal and Ward. Federal investigators would later determine that the agreement was used by McDougal to further conceal the sham transactions.

[interviewing] Would it have required an extraordinary level of discernment on Hillary Clinton's part to have recognized its purpose, this instrument?

VIET DINH: Well, I don't even know that it requires very much discernment to recognize this because we now know from the testimony of Don Denton, who was then Madison Guaranty's loan officer, that on April 7th he and Hillary Clinton had a conversation.

DON DENTON: She called me on the telephone.

PETER BOYER: Said?

DON DENTON: As I recall, her understanding of the transaction was to set up a situation where Seth would be assured of money to repay that loan to Madison Guaranty Savings and Loan.

VIET DINH: The telephone call that now we know from Don Denton's testimony was the one where he warned Mrs. Clinton of the possible impropriety of this transaction and where she summarily dismissed his concerns.

DON DENTON: As I recall, she left me with the impression that I was to take care of the S&L and she'd take care of the legal aspects of that transaction.

PETER BOYER: Briefly put, Hillary Clinton either knew or should have known that that instrument was of at least a suspicious nature.