A: I was examiner in charge for banks in Arkansas and was responsible for those banks specifically. Then the larger banks in that five state region, we would combine forces and examine larger banks. So, I worked in all the five states but was directly responsible for the banks in Arkansas.

Q: Were there particular banking problems that an examiner would notice? The potential problems, any of the Arkansas profile that would cause a light bulb to go on over the head of a bank examiner?

A: I don't think there was anything particularly unique in that regard. I detected that there was a greater tendency for politicians to receive extensions of credit and preferential treatment in granting of those. That was not unique in itself but I think the degrees with which those credits were extended to political was perhaps a little more liberal in Arkansas than in some of the other states I had observed.

Frequently, and a little unique in Arkansas, you'd see loans granted to corporations owned by politicians or loans directly to politicians and there would be very little supporting data. The bankers traditionally would just rather smile, without any concern at all, indicate well, this is the attorney general or this is a state senator, this loan will be alright.

Q: You're hired at the Union Bank. A big bank was it, relatively speaking?

A: It was one of the three major banks in the market at the time.

Q: In that capacity, as an officer of the Union Bank, one day you meet Jim McDougal. How did that happen?

A: It was through a transaction involving former Senator Fulbright. The owner of the institution, the Union National Bank, had had a long relationship with the Senator. Called me and indicated that he and Jim McDougal wanted to buy some land. They bought unimproved, basically rural, land. McDougal was very apt in dividing that land up and selling it off under contract, generating notes, receivables, from the sale. We did a number of those transactions with the backing of the Senator, with Jim McDougal. That began in probably 1975.

Q: So, Jim McDougal was a what at that period of time? A real estate broker? A land speculator?

A: A and speculator would probably, he would fall into that category. Jim would locate two to one thousand acres of rural land. Was able, in most cases, to buy that land for approximately $100 an acre. Jim would go out, make plans, build small roads, cut right of ways to that property, set up a sales office in the immediate area. Have Sunday afternoon meetings out there and people would drop by to look at the property.

He would actually sell a lot for upwards of $700 to $800 to $1000 an acre, remembering that he paid $100 for it. Getting $150 down payment and then a note for the balance of that. The buyer would pay that note off over some extended period, usually five to ten years.

Q: So he was pretty successful at this?

A: Quite successful at it.

Q: And was the moment in Arkansas or in Little Rock, was the moment conducive to a sort such as Jim McDougal and his land dealings?

A: I don't think we would have entertained a financing transaction of that nature had it not been for the backing and involvement of Senator Fulbright. Now, having said that, once they did eight or ten of these transactions and were very successful at them, Jim's credibility was much enhanced at the bank and his borrowing ability.

Q: In 1978 McDougal comes to you with the Whitewater proposal. Tell me about that.

A: Actually, that transaction did not come directly to me from Jim McDougal. The transaction was presented to me by a lobbyist who worked for the Union Bank. His name was Paul Barrie. Barrie approached me, indicating that the ownership of the bank, it was family owned by the McAdams family, was desirous of extending a $20,000 loan to assist the current attorney general, Bill Clinton, and our existing customer, Jim McDougal, to buy land in Marion County.

Q: Interesting. Was that approach, the nature of that approach, out of the ordinary.

A: That particular one was out of the ordinary. That was a pure loan being extended on the basis of political affiliations. We had not extended unsecured credit to Jim McDougal, we had not extended credit to Jim McDougal without the backing of Senator Fulbright. Yet this transaction came up as an unsecured loan to be used as the down payment on the purchase of other land.

At that time the joint....was to be Bill Clinton, who had a very modest income and no substantial assets.

Q: Who was the lobbyist?

A: Paul Barrie.

Q: Had the lobbyist ever approached you with another such deal?

A: I think there had been a number of lesser politicians that Paul Barrie stayed in contact with and we had financed vehicles for small extensions of credit as accommodations. I think that was the term we used at the time to political entities.

Q: But had there been, just out of curiosity, had there been a deal that originated, that you first heard about from Paul Barrie, the lobbyist?

A: Yes, Paul had a following. He served the political entities and did his job quite effectively as a lobbyist. Stayed in touch, I suspect offered banking services to these people. And those that either didn't have established banking relationships or were unable to get additional credit through their banks, would rely on Barrie.

Q: And what they wanted, what McDougal and Bill Clinton wanted, was money for the down payment on Whitewater?

A: That's correct.

Q: When, at some point, a McDougal loan involving Bill Clinton crosses your desk, enters your field of vision, you are not able to say with young Bill Clinton, as you were with Fulbright, ah this is a politician who also happens to be good for this loan. I know that this loan is safe because it's Bill Clinton.

A: In that particular case the loan was being granted because of his political status, not his net worth.

Q: What was the loan for? What did McDougal and Bill Clinton need the money for?

A: It was the down payment for the purchase of the acreage in Marion County, which later became Whitewater development.

Q: How much?

A: The loan granted by Union Bank was $20,000 and I believe the first mortgage was $183,000...

THE CONVERSATION TURNS TO MCDOUGAL'S PURCHASE OF A BANK...

Then McDougal found the Bank of Kingston, approached me with the prospects of providing the financing to buy that bank. We did a lot of bank financing, we liked that kind of financing, it was very lucrative for the lending bank. And traditionally banks had been always able to get out or find other buyers if the transactions weren't successful.

Q: Why in the world did McDougal want to buy a bank?

A: He thought it would be very successful in his sale of land, undeveloped land. Jim really, to a real small degree, was operating something similar to a bank, or at least certainly a financing operation, when he'd sell land. Remember the example, he'd buy land for $100, sell it for $900 and take a note for $750. So, he in essence was running a bank, he was granting loans and collecting loans without having the benefit of the deposit base to fund it.

He was having to borrow the money from Union Bank and others rather than putting a sign out and asking people to deposit money in his bank.

Q: So owning a bank would--

A: Owning a bank solved his little financing problem.

Q: What kind of bank did he run?

A: 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.

Q: So, from the beginning it seemed not that he wanted to go into the banking business per se, to be Jim McDougal banker, but for what purpose?

A: Well, I gave the example that Jim had been, in essence, in the financing business anyway and this would be a resource to help him. I think many people were enamored with the prospects of owning a bank and Jim liked the term of being a banker. There's a certain prestige and respect that goes with that. I think he certainly underestimated what was involved in owning and running a bank. But it's not uncommon for someone to want to be a banker or at least own a bank.

Q: Did you say anything to him? Did you keep regular tabs? Did you pay him any visits?

A: Yeah, we had some oversight. We began to suspect that there problems at the bank. I and some other Union staff members went up there. We did a mini-investigation or examination of the institution and saw the problems. We reviewed examination reports by the state banking department, as well as the Federal Deposit Insurance Corporation.

We became concerned. We continued to monitor and put pressure on Jim to solve those problems.

Q: And how did he respond?

A: I don't think there was any real--Any improvements of any substance.

Q: Help me to visualize this, if you will, Mr. Denton. Help me to picture what it must be like to be out of pocket, in effect, a substantial amount of money to Jim McDougal and to recognize that he's running this enterprise in a not very responsible way. And to feel personally obliged to go try to address it. What sort of figure does Jim McDougal present to representatives from the bank coming up to--

A: In the sports analogy that's the agony of defeat portion of the transaction. Obviously, when a banker, a lender,extends credit to someone who has a good idea and a good prOject and they loan them money, take some risk obviously, extension of credit involves risk, and the project works there's a great deal of comfort and joy in seeing that transaction work and pride.

On the other hand, the other side of the coin, when it doesn't work there's a great deal of anguish.

Q: But when you go see Jim McDougal is he remorseful and hang dog in his aspect?

A: Jim is a natural salesman and his mood and characteristics and song of the day changes with the mood.

Q: So he greeted your visit with an optimism?

A: Oh yeah. As I recall Jim used his normal techniques and assured us that these were temporary problems. The regulators were overreacting and that he'd have this situation solved in no time.

Q: Did you believe him?

A: Jim was very easy to believe. We took a lot that Jim said with some skepticism but we were hopeful that Jim could solve the problem.

Q: And to some degree you have relatively little choice? You kind of need to hope that it does work out.

A: You certainly want to believe it.

Q: Yes. And so here we have this situation. McDougal is running his bank up there in a manner that, shall we say, you wouldn't be running the bank if you were in charge. You all are concerned. He's on uncertain ground and falling on shaking practices. And then he wants another loan to buy and S&L. How did you hear about the savings and loan?

A: It was a rather embarrassing situation. As I recall at a loan committee meeting, that's a meeting that's attended by loan officers and certain directors of the bank at Union National Bank. Someone had passed the information along that they had heard on the street that Jim McDougal had bought a savings and loan in Augusta, Arkansas.

It was particularly embarrassing to me since I was the loan officer for the bank and did not know that Jim had done that. So I immediately left that meeting and drove to his home, I believe near Augusta. McCroy I believe is where Jim was living. Or Jim was living in Bradford, Arkansas and I believe the institution had a branch in Bradford.

We had our prayer meeting that afternoon.

Q: What did you say to him?

A: I frankly left there believing that Jim had a pretty good idea of buying the S&L. Branching and commercial banking business was very restrictive at that particular time in Arkansas. Banks could not establish branches in other counties and around the state. Yet an S&L could.

So, McDougal bought, in essence, another bank. He bought an S&L charter with the ability to raise deposits. And as I recall he paid $50,000 for it. So, it's just unheard of-- I mean, the charter itself was worth that.

Q: Okay. So at the time McDougal gets this idea, the savings and loan idea, and presents it to you as his explanation, were there lots of people doing it?

A: I don't recall having seen that having been done before.

Q: So he was among the first?

A: That's correct.

Q: And it struck you as actually a pretty good idea.

A: Yes.

Q: And he did, in fact, branch with what became Madison Guaranty into Little Rock. Once Madison was here in Little Rock it grew exponentially. How did he grow Madison?

A: Jim was willing to pay a higher rate of interest on certificates of deposit. Advertised them very aggressively, used the services of professional brokers, investment banking houses, and solicited deposits both locally, statewide and nationally through brokers.

Q: Was there a significant growth in deposits?

A: I believe that Madison had a deposit base of about $120 million at the peak, when the brakes were finally put on.

Q: From a starting point of what?

A: Two and a half million.

Q: And what was the profile of the S&L, Madison, that he brought to Little Rock and grew so quickly? Was it an institution that you would notice if you were living in Little Rock?

A: Oh yeah, it received a lot of publicity. Enormous budget for advertising, there were ads, large ads, significant ads, in the paper each day, a lot of television time. McDougal's various projects, the land development projects, Maple Creek and some of the others, were publicized heavily on local television.

Q: So, you suddenly had this thing called Madison Guaranty. It had a ton of money, a sword of Damocles hanging over its head, but it had a ton of money and an operator at the helm. And you went to work for this institution. Under what circumstance, Mr. Denton?

A: I was terminated from the Union National Bank in January of 1994, pardon me 1984, 1984. I did consulting work for a period of time and ran into Jim McDougal one day and he asked me what I was doing. I indicated I was doing consulting work. He said hey, I've got $50 or $60 million worth of excess funds that I`ve got invested in Federal funds, that's a source of investment that banks can sell off their excess funds on a day basis at a relatively cheap price. He said I've got $50 to $60 million I need to get to work quickly because it's costing us a lot of money and I can't generate commercial loans. That's your background, come to work for us and put that money to work. Develop a commercial loan portfolio for Madison.

And I subsequently did.

Q: What did he mean he couldn't generate commercial loans? You mean he had no expertise in that area?

A: He didn't have the expertise, he didn't have the staff. He didn't have the contacts to call on and establish businesses and didn't know the people, the major borrowers.

Q: So, you didn't have to think long. It seemed--

A: I called myself a consultant but I was really unemployed. So, yeah, I went to work for him.

Q: Where, literally physically, did you go to work? At Madison Guaranty?

A: Yeah at Madison on Main Street in Little Rock.

Q: Which was what? Describe the place for me, if you will.

A: It was a renovated laundry building. It was the Majestic Laundry for a number of years. It had been closed for several years and Jim must have wanted a downtown, Main Street address. He liked that part of town, he saw some potential for renovating buildings. He bought that building, did a major renovation on it. It was done in art deco, not particularly tasteful but by the same token was a substantial over what was there at the time.

And began providing loans for renovation of surrounding buildings. So he was really doing a community redevelopment program in some regards.

Q: And so here you have this interesting new enterprise, very vibrant. A man at the helm whose vision you believed in. Was the place, was it a bustling environment inside?

A: Yeah, it was pretty hectic. Yeah, there was a lot of enthusiasm. Jim was good at that. The people were happy, it was a busy little place.

Q: How many employees, how many people would you see inside the place? If I could walk back into time and walk into Madison Guaranty in 1985?

A: There were probably 30, 40 employees.

Q: They had a sense of being part of the-- I mean, did McDougal's enthusiasms transfer?

A: Oh, absolutely.

Q: Let me hear a little bit about that. It was a pleasant place to go to work in the morning?

A: Yeah. Jim was always wound up, it was a new deal every day. I've used the example that we'd go to lunch and Jim would tell me a new deal and I'd be bubbling myself. By mid-afternoon I had thought through the transaction and it was really ridiculous, so I'd slow down. But we'd go to lunch again the next day, you know. So, he'd keep you pepped up.

Q: And a little bit of that, I would guess, is necessary to such an enterprise?

A: It certainly contributes, yes.

Q: The way that Madison Guaranty operated on a day to day basis was fundamentally different, I would guess, than anything you had specifically experienced in your banking career?

A: I was shocked at an S&L environment, yes.

Q: How so? Help me to understand that.

A: It was a very loose environment. Again, the times were such in the S&L industry that it was chaos. Yet there was promotion to grow. So, the environment in the S&L was one of constant growth. The S&Ls were doing big deals, way beyond what commercial banks would have done. What was happening, to a large extent, on S&Ls particularly in the Southwest and Arkansas also, they were making large deals out of their market, which traditionally has been received as unsound.

Q: It was very exhilarating. Was it scary being part of this?

A: Yeah, I think that was probably a proper description. The example that I can give, that I recall, I'd been there a couple of weeks and Jim told me about some deal he was going to do or some loan that was being put together. And I was shocked and I just kind of backed up and explained to Jim that 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.

THE CONVERSATION TURNS TO MCDOUGAL'S FINANCING OF LAND DEALS...

Q: So he has this money that he needs to do something with. Why can't he just take that money out and go buy land and develop it?

A: Because there was a restriction on the amount of those deposits that could be invested in projects. I don't recall now what the number was but there was some percentage of assets that could be invested in development.

Q: And he created a subsidiary of Madison Guaranty for this purpose?

A: Yes, his real estate development was a subsidiary of Madison S&L. It was called Madison Financial Corp.

Q: And did they undertake any such projects?

A: A number of projects. Maple Creek, Goldmine Springs, there were a number, eight or ten maybe, maybe ten different projects around the state.

Q: Of those the most noteworthy?

A: Maple Creek-- Because of its losses that were sustained Castle Grande is probably the most famous. Maple Creek probably was the most successful.

Q: Good. Let's talk about Maple Creek for a minute. Was Maple Creek early on in the process?

A: Yes.

Q: Maple Creek was one of these land development deals that McDougal did through the subsidiary, a Madison subsidiary, Madison Financial. How did it fare?

A: It was a popular project. A number of lots and houses were sold out there. The project was rather large and required an enormous investment in on site improvements. The infrastructure, including water, sewer, and streets would have required an enormous investment. Jim, through his Madison Financial Corporation, piecemealed it. He developed streets as needed and it was a constant problem of developing it.

But it was reasonably successful and a sell out. He had a lot of TV ads done there. There were a lot of radio stations doing live Saturday afternoon or Sunday afternoon spots out there. So it got a lot of publicity and a lot of visitors.

Q: Now near to Maple Creek McDougal set his eye, cast his eye, on another piece of property which came to be known as Castle Grande.

A: Castle Grande.

Q: I want to talk to you about that in particular and in the broader sense what McDougal's plan and vision was in developing Castle Grande. Did his vision alter from just merely this money-making -- buy land at $200 an acre, sell it at $800 an acre? Was there ever a philosophical bent to it at all?

A: I think Jim saw that he had a rather substantial amount of financing available through the S&L because of the way he was raising deposits. He saw a need for financing to low and moderate income families. Traditionally those people did not have access to financing through traditional sources.

The whole S&L concept, from origination and which continued philosophically, was that the S&L industry should provide housing for Americans. And a large segment, particularly low and moderate income families, could not qualify for financing at the time.