once upon a time in arkansas
Jim Clark's Testimony

Federal bank examiner Jim Clark's Testimony on Madison Guaranty Saving & Loan Association

Editors' Note:
Jim Clark's 1986 visit to Madison Guaranty precipitated a series of transactions (specifically the Dean Paul loan) by Jim McDougal and others which was used to obfuscate the true nature of the Castle Grande deal. After months of investigation, examiner Clark identified the entire series of transactions as fraudulent, which led to proceedings which removed Jim McDougal from the S&L and resulted in its insolvency. Clark rated the institution a "5," which was the lowest possible rating on the Federal Home Loan Bank Board's scale of 1 to 5. In the interview memo below done by a congressional committee, Clark listed a variety of illegalities and severe mismanagement at Madison.


August 7, 1995

I am James T. Clark, and I reside in Kalamazoo, Michigan. I am currently employed by the Comptroller of the Currency as a National Bank Examiner. I was previously employed in a similar capacity by the Federal Home Loan Bank Board and the Office of Thrift Supervision. I worked In the Sixth Federal Home Loan Bank District headquarters in Indianapolis, Indiana.

In that capacity, I was Examiner in Charge of the 1986 examination of Madison Guaranty Savings and Loan Association of Little Rock, Arkansas. At the time examiners were called from around the country to the Ninth District headquartered in Dallas, Texas. Sixth District examination administrators assigned the Madison Guaranty examination to me and selected a crew of assisting examiners.

On arriving at the Little Rock Field Office of the Dallas Bank in early March 1986, I learned that the Ninth District supervisory authorities had several concerns about Madison Guaranty. These problems had been reported by an examination In 1984 and were addressed by a Supervisory Agreement with the Board of Madison Guaranty. However, the passage of time had only heightened supervisory concern. The problems included rapid growth, inadequate net worth, and self dealing.

Early in our field work, I developed an idea of what was happening at Madison Guaranty. A group of Madison Guaranty Insiders was obtaining cash in what amounted to a pyramid scheme. The scheme involved sham sales between Insiders of land owned by Madison Guaranty's service corporation, Madison Financial. Profits from these sales were used to Justify deposit growth. A portion of the cash from these deposits was being diverted into the hands of insiders. The principal insider was James McDougal who was a major stockholder of Madison Guaranty and the President of Madison Financial.

The examination crew spent the rest of our time at Madison Guaranty confirming that this scheme was in operation, reporting out findings to supervisory officials at the Dallas Bank, and assisting them in taking supervisory action. This process required much effort because the records at Madison Guaranty were very poor and were intentionally kept so. As the examination work proceeded, we found that the thrift was insolvent.

The work culminated in a Cease and Desist Order that was accepted by Madison Guaranty's Board of Directors in August 1986. Members of senior management, including Mr. McDougal, also eventually left. Our Field work was completed by September 1986. After that time, I had only infrequent contacts concerning Madison Guaranty.

To the extent of my memory I will try to answer your questions. Otherwise, I can only recommend that you consult the extensive workpapers from the 1986 examination.


On July 6, 1995, Committee staff interviewed James Thomas Clark, who was the examiner-in-charge at the March 1986 Federal Home Loan Bank Board (FHLBB) examination of Madison Guaranty, at the O'Neill House Office Building in Washington, D.C.


Employment History

Clark currently is employed as a commissioned national bank examiner for the Office of the Comptroller of the Currency (OCC), Kalamazoo, Michigan Duty Station. He began his examination career in October 1973 with the Federal Home Loan Bank Board, staying with the FHLBB through various reorganizations until December 1990.[1] He then did a brief stint at a law firm before joining the OCC in January 1992.

In 1986, Clark was a senior examiner for the Federal Home Loan Bank of Indianapolis. From 1973-1986, Clark stated that he participated in well over 100 exams, and had been the examiner-in-charge of approximately 100 exams.

General Examination Process

Clark stated that management generally is advised that an examination will be conducted several weeks in advance of the examination team's arrival at the institution. The time spent at an institution to conduct an examination depends on the size of the institution, the trustworthiness and cooperation of management, and the magnitude of problems discovered. Clark characterized the cooperation of management as "critical" to the examination process. Provided an institution was "clean," an examination could be completed in two to four weeks.

The hierarchy of enforcement actions that can be taken against an institution include: (1) formal supervisory agreement, (2) administrative legal action (cease & desist order), and (3) deposit insurance termination. Clark advised that a cease and desist order is a serious action.

Preparation for Madison Guaranty Examination

Prior to arriving at Madison Guaranty, Clark visited the FHLB field office in Little Rock to review previous examination reports, including the supervisory agreement under which the thrift had been operating since 1984, and to meet with Steve Parr, the field office supervisor who scheduled and coordinated examinations in that geographical area. Parr informed Clark of the potential problems he would encounter at Madison Guaranty, particularly insider dealing and rapid deposit growth.

Clark recalled that Parr had been contacted by an informant, a disgruntled former clerical worker at Madison Guaranty, who had alleged that the accounts of senior officers were chronically overdrawn. The informant also provided other investigative leads.

Parr told Clark that Jim McDougal was politically connected, that he knew Governor Clinton, and that the Governor's wife and Susan McDougal were social friends. In this regard, Clark stated that the examination team occasionally found notes and correspondence between the McDougals and Clintons referencing social engagements. Although Clark advised that McDougal never explicitly suggested that he had political influence during the examination, he did tell him that he used to work for Senator Fulbright.

First Impressions of Madison Guaranty

Clark's initial impression upon arriving at Madison Guaranty was that its offices were very well decorated, and that there were a number of expensive cars in the parking lot. He also was concerned about the thrift's investments in fixed assets and the reports of extensive insider dealing.

Clark formulated a hypothesis about what was occurring at Madison Guaranty during his first month at the institution, which he later was able to prove.

Cooperation of Madison Guaranty Management

Upon arriving at the institution, Clark and his fellow examiners were met by John Latham, the thrift's managing officer who would be Clark's primary contact during the examination. Clark stated that while Latham was cordial at first and responded in some manner to his requests, he became increasingly recalcitrant as management began to surmise what the examination team was finding. Delays in receiving documents and answers to questions got progressively worse as time went by. Latham would give partial answers and was defensive in his responses. Clark stated that the atmosphere was tense.

Clark used McDougals office during the exam, because McDougal generally was not present at the institution, instead spending his days either at Madison Financial Corporation ("Madison Financial"), which was located down the street from Madison Guaranty, or at the sales office at Castle Grande, one of Madison's real estate developments.

Role of Arkansas S&L Department in Madison Guaranty Examination

Clark stated that the Arkansas State Securities Department did not participate in the examination of Madison Guaranty, although Beverly Bassett Schaffer did attend a meeting on July 11, 1986 with Madison Guaranty's board of directors, which is discussed in a separate section of this memorandum. Clark drew a clear distinction between the involvement of Arkansas regulators as opposed to regulators in other states in which he has examined state-chartered thrifts, mainly Michigan and Indiana. In most cases, state examiners participated in the examination process and either issued an independent report or contributed to the FHLBB report, but not in Arkansas.

Based upon his 1986 exam, Clark concluded that Madison Guaranty was in violation of state law limiting direct investments in real estate projects. He believes that the State had an obligation to monitor the thrift's activities in this regard, but he observed no oversight being exercised by the State Securities Department during the entire time he was in Arkansas.

Length of Madison Guaranty Examination

Clark stated that the lack of cooperation from management and the extent of insider dealing resulted in the examination of Madison Guaranty taking approximately six months. Although the examination of Madison Guaranty was not the longest examination he's ever been involved with, it was in the "top 5."

Madison Guaranty Examination Findings

Clark rated the institution a "5," which was the lowest possible rating on the FHLBB's scale of 1 to 5, and noted the following as his general findings:

(1) Madison Guaranty was insolvent.

(2) It was not in compliance with the 1984 Supervisory Agreement.

(3) Significant funds had been removed from the institution and given to affiliated persons.

(4) The thrift essentially was operated as a "pyramid scheme," with fictitious profits recognized through insider transactions using Madison Guaranty funds exclusively, which increased the institution's stated net worth, thereby allowing it to attract more deposits and facilitating even greater investments, with McDougal and other insiders raking off funds in the process.

(5) The salaries of McDougal and Latham were excessive, and each had a bonus arrangement based on net income which they manipulated through their "pyramid scheme."

Clark stated that the bonus arrangement based on a percentage of net profits was fairly atypical and that he always criticized such an arrangement when he discovered it in the course of an exam. The result of the 1986 examination of Madison was that Latham was removed from his management position at Madison Guaranty, McDougal departed as president of Madison Financial Corporation, and the board of directors consented to a cease and desist order.[2]

Extent of Insider Dealing at Madison Guaranty

Clark stated that the extent of insider dealing at Madison Guaranty was in the "top 3" of all examinations in which he has participated in his 20 years as an examiner. Since Madison Guaranty's "straw borrowers" had no real intention of repaying loans associated with real estate developments, the examiners classified the loans, resulting in the institution's insolvency. Since the borrowers had no personal stake in the properties purchased, Madison Guaranty assumed all the risk.

Clark determined that the "McDougal-Henley" group of insiders clearly had control of the institution and appeared to be acting in concert to the detriment of the long-term health of the institution. McDougal was able to influence the board of directors of Madison Guaranty, which Clark described as having many more members who were Madison Guaranty officers and directors than was typical or prudent.

Rapid Deposit Growth at Madison Guaranty

Madison Guaranty's growth initially was fueled by brokered deposits. However, by the time of the 1986 examination, that practice had virtually stopped and deposit growth was generated through attracting local deposits by offering higher savings rates than other area institutions. Clark was not aware of who brokered deposits for the thrift.

Tracing of Loan Proceeds

Clark stated that loan underwriting and documentation were extremely poor and the examination team could not discern the purpose of loans or where loan proceeds had been disbursed from the loan files. Clark could not recall a single loan file at Madison that he considered properly documented. He therefore relied on the thrift's check-clearing function to attempt to trace loan proceeds. However, on most real estate loans, the only check issued was a single lump-sum check to a title company.[3]

Through examination of the check-clearing function, Clark was able to confirm his suspicions that loan funds were going to insiders and were then being used as down payments on land purchases from Madison Financial Corporation. In other words, sales were not being financed through independent sources, but 100 percent by Madison Guaranty.

Since he could not fully trace loan proceeds, Clark could not determine whether any Madison Guaranty loans were diverted to political campaigns. However, he did determine that loans for which he was unable to trace the proceeds went to individuals associated with campaigns. He identified Jim Guy Tucker and Bill Henley, who was a state senator, as two such individuals.[4] He specifically recalled a loan to Jim Guy Tucker in which the funds did not appear to have been expended on the property purchased.[5]

Clark did not uncover evidence of check kiting during the examination, but did discover that insiders were writing checks against insufficient funds.[6]

Intent of Madison Guaranty Management

Although Clark said he "couldn't get into McDougals mind," he believed that his failure to underwrite and document loans was intentional to conceal the true purpose of loans. Clark reasoned that Madison Guaranty had been put on notice of the poor record keeping by virtue of the 1984 supervisory agreement under which the institution had been operating, but had not made any effort to correct the problems. The thrift had even hired the examiner-in-charge of the 1984 FHLBB examination, Sarah Hawkins, but still was not in compliance with loan underwriting standards.

Clark characterized the thrift's non-compliance with the 1984 supervisory agreement as a "big deal," which showed that management either was incapable or unwilling to-implement changes deemed appropriate by examiners. In Clark's judgment, since they had hired the 1984 examiner-in-charge, management should have been capable of making changes if it had wanted to.

Madison Financial Corporation

Clark's 1986 review disclosed that Madison Financial, which was the thrift's real estate investment arm, had no independent resources of its own, relying 100 percent on Madison Guaranty to fund investments in real estate projects. Property would be sold to an insider acting as a straw buyer, and a sales commission would be paid to the buyer to fund the down payment. The buyer would then obtain a loan for the balance of the purchase price from Madison Guaranty. Madison Financial would set the cost basis arbitrarily low on properties, thereby allowing it to recognize a large but fictitious profit on its books. The net income recognized would flow to Madison Guaranty, with McDougal and Latham taking their cut along the way.

Clark stated that such sales did not constitute a "real market" and that the underlying properties were worth less than the sales prices and appraised values. The recognition of the profits as shown above was not in accordance with Generally Accepted Accounting Practices (GAAP), and application of proper accounting procedures would have wiped out Madison Guaranty's net worth.

Madison Financial, as well as Madison Marketing and Madison Real Estate, had very little "substantive corporate existence" of their own. The entities were controlled by the same group that controlled Madison Guaranty, and had common signatories on checking accounts. In May 1986, management acknowledged that Madison Marketing and Madison Real Estate were essentially "DBAs" of Madison Financial, and Clark began treating them all as Madison Financial.

According to Clark, Madison Financial's checking account was chronically overdrawn and was the main conduit for Madison Guaranty funds leaving the institution and going to affiliated entities.

30-Day Interim Report

Due to the length of the examination, Clark prepared a 30-day interim report dated April 2, 1986 in accordance with FHLBB procedures. He did not discuss his tentative findings with management at this time because he believed that management was not being totally forthcoming and that "tipping his hand" might give Madison's officers and employees a better idea of what he was looking for and thus of what to hide from the examiners.

60-Day Interim Report

Again due to the length of the examination, Clark prepared a 60-day interim report dated May 8, 1986 in accordance with FHLBB procedures. Although he still had not discussed his tentative findings with management, the time to "put everything out on the table" was fast approaching as management was beginning to demand information about his findings. The 60-day interim report focused on the status of three real estate projects: (1) Maple Creek Farms, (2) Castle Grande, and (3) Campobello Island.

Maple Creek Farms Development

Maple Creek Farms was one of Madison Financial's first real estate developments and had progressed further than most other developments. The pattern of insider dealing established at Maple Creek Farms was characteristic of later developments. Although initially some success was achieved in selling lots, sales soon began to drop off and no longer were "arms-length" transactions, but sales to straw borrowers, including many employees of the thrift.

Although Clark did not recall visiting the development personally, members of his examination team, as well as Robert Young, a field manager working out of the Little Rock FHLB office, were familiar with the project and did a lot of the work associated with Maple Creek. The examination team determined that Maple Creek caused a loss to the thrift.

Clark did not recall any sewage disposal issues at the development or the March 1986 meeting which Governor Clinton orchestrated between McDougal and county sanitarians.[7]

Castle Grande Development

Clark visited Castle Grande and stated that the project "didn't make sense to me." The land was low and swampy and would require a great deal of effort to develop into a residential subdivision. Clark stated that planning, feasibility and cost controls were so "woefully lacking" that it was difficult to see how the development could make it. Previously, Castle Grande had failed as an industrial development, and Madison Guaranty had purchased it in a workout agreement with various area banks that had participated in the industrial development venture. Clark stated that one of the biggest unanswered questions resulting from his examination was whether Madison Guaranty's initial purchase of the land was an "arms-length" sale. He didn't recall at first which Madison Guaranty employee was involved in negotiating the acquisition of the property, believing that it may have been Bob Wilson, but later confirmed that the employee was Seth Ward.

Campobello Island Development

Clark and an assistant examiner, Darlene Ford, visited Campobello Island, Madison Guaranty's development off the coast of Canada. As with Castle Grande, Clark's impression upon arriving at Campobello was that the development did not make any sense. In this regard, although Madison Guaranty had several different tentative development plans, none of them was worked out in any detail or supported by feasibility studies.

Apparently, McDougal was an admirer of Franklin Delano Roosevelt, who vacationed at Campobello Island, and impulsively decided to purchase the property in response to an advertisement he noticed in the Wall Street Journal.

The principal problem with the development was that it lacked a central sewage system, which would have been very costly to install. To avoid the expense, McDougal decided to just put in a well and septic tank. Another problem was that the thrift was in violation of the Interstate Land Sales Act, which required that the development be registered before any sales occurred. In the examination team's review of Campobello Island, a memorandum authored by Beverly Bassett Schaffer before her appointment as S&L commissioner was discovered. The memorandum pointed out that the thrift was in violation of the Act.

Madison Guaranty incurred a large loss at Campobello and recognized a significant amount of inappropriate profits.

McDougal/Latham Meeting

In late May 1986, Clark and Robert Young met with McDougal and Latham to present their examination findings, and received responses from McDougal and Latham that, in Clark's view, were inadequate. Although Clark was expecting a spirited defense of the thrift's real estate investments, that is not what he got. Instead, McDougal and Latham were strangely unresponsive and did not offer any counter arguments to the examiners' exceedingly critical findings. Clark felt that management may have been trying to buy some time and find out exactly what the examiners knew before they offered a counter argument. Clark had relatively little involvement with McDougal during the examination process, but commented that he was always "very cool and unflappable."[8]

407 Investigation

Clark recommended to his supervisors that a 407 investigation be conducted with respect to Madison Guaranty because he could not fully trace loan proceeds. Under a provision of the National Housing Act (Section 407), the FHLBB was empowered to subpoena documents and sworn testimony from sources to whom the examination team did not have access. Clark stated that a 407 investigation was rather unusual and he had only requested one other such investigation prior to Madison Guaranty. Clark noted that the request reflected his high degree of concern about Madison Guaranty's operations.

A 407 investigation would allow investigators to review records at other institutions and companies, such as Madison's affiliated title company, Quapaw Title, to trace loan proceeds. Although his recommendation was accepted, Clark was not involved in the investigation or its findings. Clark said that his mission was solely to examine the "safety and soundness" of Madison Guaranty as efficiently as he could, and he did not have the time to look at every transaction.

July 11, 1986 Dallas Meeting

On July 11, 1986, Clark and the FHLBB supervisory agents called a meeting in Dallas with Madison Guaranty's board of directors. At this meeting, the board was informed that Latham must be removed and was presented with a cease and desist order, to which the board subsequently consented. Contrary to Beverly Bassett Schaffer's claims that the meeting was a joint confrontation of the board by the state and FHLBB, Clark stated that, as far as he knew, she was not involved in setting up the meeting and that she was merely invited to attend as a courtesy.[9]

On the morning of the meeting, Clark recalled a discussion among supervisory agents as to whether Schaffer should be allowed to attend due to her prior involvement with Campobello Island, and since problems had been experienced in the past with state regulatory authorities taking sides with thrift management. Clark could not recall whether the supervisory agents' "taking sides" concerns related to Schaffer's past actions, or to those of some other state regulator.

Clark stated that Schaffer said relatively little during the meeting and that, in his view, it was strange that she was silent when asked for her comments by the supervisory agent leading the discussion at the meeting. After all, Schaffer had responsibility for monitoring Madison Guaranty's compliance with state investment limitations that the FHLBB was now charging it with violating. Clark's experience has been that state supervisors participated much more actively in such meetings. Clark did recall that Schaffer asked who represented the McDougals, a comment which Clark characterized as "odd" and irrelevant to the proceedings at hand.

Clark was shown his handwritten notes regarding a request from Schaffer for the thrift to return the state's Campobello file shortly after the meeting, but did not recall the incident.

Madison Guaranty Insiders

Clark defined "insiders" as officers, directors, affiliated companies or companies owned by affiliated individuals, and any other persons with the ability to influence the board of directors.

Clark was shown his handwritten notes on the list of items the "informant" had relayed to the Little Rock FHLBB field office and asked to explain his "Democratic political family" note next to the names of Jim Guy Tucker, Steve Smith, Jim McDougal and Governor Clinton. Clark responded that "it being Arkansas, most of the people were Democrats."


Frequency of FHLBB Examinations

Clark stated that examinations generally occurred every 1218 months, depending on past history of problems, size of the institution, staffing, budget, etc., but that the goal was to examine on an annual basis small institutions such as Madison Guaranty. During the 1980s, Clark advised that staffing reductions and budgetary restrictions increased the time between examinations. In addition, a large number of new thrifts had been formed which exceeded the capacity of the FHLBB to regulate. However, Clark stated that off-site monitoring of institutions occurred continually between on-site examinations.

When asked if Madison Guaranty would have benefited from annual examinations and if McDougal's operations would have been shut down earlier as a result,[10] Clark said "maybe," but that an examination not as in-depth as his six-month examination probably would not have uncovered as many problems and therefore would not have made as compelling a case for removing management and placing the thrift under a cease and desist order. According to Clark, the frequency of examinations is not as important as what you accomplish when you get there. Clark was asked if it was the land developments that caused Madison Guaranty's failure, and replied affirmatively, adding that the losses incurred on those developments were largely the result of the insider dealing.

Clark advised that Madison Guaranty's use of a subsidiary corporation (Madison Financial) to invest in real estate projects was certainly done at other institutions he had examined, but not nearly on the scale of Madison Guaranty.

Frost Audit Reports

Clark stated that he reviewed the Madison audit reports prepared by the Little Rock firm of Frost & Co., and could not understand "how in the world" the auditors could have gone along with Madison Guaranty's recognition of profits.

July 11, 1986 Dallas Meeting

Clark could not recall Beverly Bassett Schaffer attempting to disrupt the meeting or taking sides with Madison Guaranty, but reaffirmed that it was strange that she was asked if she had anything to say, and said that she did not.

Whitewater Development Company, Inc.

Clark only recalled Whitewater vaguely from the examination, indicating that he noticed a small investment in Whitewater on Madison Financial's general ledger, but that the investment was minor compared to the thrift's investments in other projects and therefore was not reviewed.[11]


On redirect, Clark confirmed that regardless of the FHLBB's examination schedule, the state had independent authority to conduct examinations.

Clark also confirmed that, since Whitewater was a private investment of the thrift's owner and not a development of Madison Guaranty, any investment in Whitewater by Madison Financial would be inappropriate.

With regard to the issue of Madison Guaranty not being placed in conservatorship until March 1989, Clark confirmed that removing management and placing the institution under a cease and desist order, as was done with Madison Guaranty in 1986, can serve the same purpose as a conservatorship, provided that new management is competent.

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