Jon Christian Ryter -- Debt for Trees, Part 1

DEBT FOR TREES
PART 1

By Jon Christian Ryter

September 1, 2005

NewsWithViews.com

Houston financier and corporate raider Charles Hurwitz's problems began with the collapse of a little known Texas thrift in 1988, United Savings Association of Texas�only Hurwitz's purported complicity in the collapse of the savings and loan company never surfaced until about the time his company, MCO Holdings (which changed its name in 1995 to Maxxam, Inc.) assumed Pacific Lumber Company in 1986. Once the Pacific Lumber buyout was complete Hurwitz's problems began. But not from the US government� from environmentalists.

One of Pacific Lumber's most valuable assets was a stand of 1,000-plus year old coastal redwood trees in Humboldt County�in a 6,000 acre tract of ancient redwoods in the 90,000 acre Headwaters' Forest know as the Headwaters Grove. Each of the 300 foot tall ancient giant redwoods have a commercial street value�as cut lumber�of at least $100,000. Hurwitz, who used junk bonds to finance his takeover of Pacific Lumber needed to liquidate some of the assets of the newly acquired company to pay down the debt.

Hurwitz became interested in Pacific Lumber when junk bond investment banker Drexel Burnham Lambert advised MCO that Pacific Lumber had made an overpriced offer to buy back its own stock in 1984, causing MCO to take a closer look at the company as a potential hostile takeover since Pacific was not interested in suitors. And the closer Hurwitz looked, the better Pacific Lumber looked. Finally, in October, 1985 he went after it, assuming control of the company in 1986.

Environmentalists feared Hurwitz would clear-cut the Headwaters Grove of its ancient treasures to pay for the takeover. In reality, Hurwitz already planned to sell off specific assets of Pacific Lumber to pay for the takeover�and the Headwaters Grove was not part of his thinking. However, MCO Holdings, which was extremely leveraged, still needed to generate a revenue stream, and planned to clear-cut up to a thousand acres of Pacific Lumber's expansive reserve of Douglas pines, spruce, coastal redwoods and other timber species which the company owned. Within a matter of months, Hurwitz doubled Pacific Lumber's relatively conservative lumber harvesting practices. That convinced the greens that a land-stripper had taken over the 117 year old company.

Pacific Lumber was an institution in northern California, and had been since 1869. It was the largest employer in Humboldt County, owning around 194,000 acres of prime timberland worth billions of dollars at retail. Yet, it was not as profitable as it could have been, or should have been, due to environmentalists who did everything possible to hamstring logging operations for over a decade. The constant inference of Pacific's logging operation by radical green groups made Pacific Lumber "easy pickings" for any corporate raider. When Hurwitz took it over it wasn't long before green groups like Earth First!, the Sierra Club and Greenpeace were targeting Hurwitz, who became the "scorched earth" villain.

In January 1995, Humboldt environmentalist activist Robert Martel filled a lawsuit in US District Court against Maxxam, Industries seeking $1.6 billion to cover the losses suffered by Maxxam's bankrupt S&L, United Savings Association of Texas plus an additional $4.8 billion in punitive damages on behalf of the American taxpayers. Because Martel represented neither the government nor the depositors of United Savings, there was no legal basis for his filing. But, his lawsuit opened Pandora's box. When the federal court�which should never have accepted the action in the first placed�ruled against him, Martel appealed that court's decision to the 5th Circuit Court of Appeals. The appellate court not only rejected Martel's appeal, it ordered him to pay Maxxam's legal fees of more than $110,000, saying that Martel's case was "frivolous"

In August of 1995, FDIC Chairman Ricki Tigert-Helfer filed the first of two "recovery" lawsuits in US District Court in Houston. The action, FDIC v Hurwitz, sought $250 million in damages�not from Maxxam (as MCO Holding had been renamed)�but from Hurwitz personally. When she filed her suit, Tigert-Helfer asked the Office of Thrift Management to investigate Charles Hurwitz and Maxxam for wrongdoing. In December, 1995 the Office of Thrift Management filed 13 claims against the defendants of its own lawsuit�against Hurwitz, Maxxam, two other Maxxam companies: Federated Development Company, United Financial Group (which was the parent company of United Savings), and the former and current directors of the S&L. The OTM sought $821 million in damages. The FDIC and the OTM both alleged that Hurwitz's business dealings with Drexel Burnham Lambert contributed significantly to the thrift's failure by not keeping it properly capitalized. They also alleged that Hurwitz "raided" the assets of United Savings to purchase Pacific Lumber, making Hurwitz personally liable for the $1.6 billion the OTM claims United Savings lost.

From the time the dual actions were filed by the FDIC and the OTM, Hurwitz's lawyer, Richard Keeton, was approached by various environmental groups suggesting that the government would entertain a "debt-for-trees" swap. Hurwitz would get to walk away from the FDIC and OTM charges if he agreed to allow the old stand of 300' tall redwoods in Headwaters Grove be deeded to the US government. The government would make the Headwaters redwoods part of the Six Rivers National Forest. In the early 1990s, Howard Hughes' estate engaged in a "debt for nature" swap when the estate traded some wetlands near the Los Angeles Airport to settle a tax bill owed the State of California. Several third world countries swapped land that US environmentalists thought should be protected for the debt they owed the United States. Bolivia traded tropical forests to clear their debt. Land swaps were also done with the Philippines and several other nations as well.

In February, 1997 Deputy Interior Secretary John Garamendi approached Maxxam to arrange for the acquisition of the Headwater Grove. Maxxam's general counsel, J. Kent Friedman, told the Clinton Administration official that Maxxam would consider selling the Headwater Grove to the Interior Department�but only on the condition that the government drop its FDIC lawsuit. "We want this case to go away," Friedman said.

Garamendi reported "...Hurwitz brought that to the table numerous times," but he added, he refused to intervene on Hurwitz's behalf, concluding it would be inappropriate for the Interior Department to get involved in the FDIC's business. Friedman said Maxxam raised the issue about the FDIC case because the action should never have been filed against Hurwitz who had undergone a lengthy, politically-motivated and ultimately unproved investigation by the Clinton Administration and a federal agency that violated its own rules in bringing the action. Hurwitz was not liable for the failure of United Savings because neither he nor Maxxam had controlling interest in United Financial�the holding company that had a minority interest in United Savings�therefore neither Hurwitz nor Maxxam had any legal authority to control the capital levels at the thrift.

At the time the Garamendi negotiations were underway, the the Rose Foundation for Communities and the Government and several other environmentalist groups managed to convince a federal court that Pacific Lumber and a neighboring lumbering camp, Elk River Timber Company, had both violated the Endangered Species Act by logging pristine forests that sheltered the spotted owl. The federal court issued an injunction forbidding either Elk River Timber or Pacific Lumber from harvesting their land. Nine times the environmentalists filed suit in federal court. Nine times the court issued injunctions forbidding the lumber companies from cutting trees on their own land due to violations of the Endangered Species Act.

(Author's note: While I did not find documents to support my belief that Hurwitz, Friedman and Keeton were very bluntly, off-the-record, advised that they might as well sell the Headwater Grove to the environmentalists and get something for their buck because it was unlikely that, anytime in the foreseeable future, they would be able to harvest any lumber from that area since the Headwaters Forest was home to the spotted owl.)

In 1999 Hurwitz caved in and sold 10,000 acres of Headwaters Forest land to the Department of the Interior for $480 million. The deal was brokered by Sen. Diane Feinstein to preserve the old growth giant coastlal redwoods. In 2002 the FDIC dropped its 250 million action against Hurwitz when the OTM settled their $821 million case under an agreement where Hurwitz paid $206 thousand, made no admissions of wrongdoing, and agreed not to discuss the suit or the settlement.

But in his settlement, Hurwitz never agreed not to file suit against the government. He immediately sued the FDIC, by asking US District Court Judge Lynn Hughes (the presiding judge in the government's case) to award him $72 million in damages to cover his costs to fight not only the FDIC charges, but the costs associated with fighting to keep the government from seizing his redwood trees�and fighting frivolous lawsuits from the Rose Foundation, the Sierra Club, Greenpeace, Earth First! and scores of other green groups who lined up to take their best shot at Maxxam in court while Maxxam and Hurwitz were distracted with the FDIC lawsuit.

Don't miss the concuding Part 2 "whodunnit" to understand how our fine justice system really works.