Tree Ring Circus
1986 Houston businessman Charles Hurwitz buys a lumber company in California. 1989 The feds investigate Hurwitz for his role in the failure of a Texas savings and loan. 1990 Environmentalists organize Redwood Summer to protest Hurwitz’s logging practices. 1995 The feds sue Hurwitz for more than $1 billion in an effort to get control of his redwoods. 2005 A federal judge dismisses the suit and awards Hurwitz $72 million in damages. Your tax dollars at work.
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United Savings was not alone in its troubles. Every large thrift, and most of the smaller ones in Texas, also failed in the eighties, mostly for the same reasons. The root cause was the great inflation of the late seventies and early eighties, which pushed interest rates as high as 23 percent. For savings and loans, which were suddenly paying a lot more for their deposits than they were making on their home loans, this was a disaster. As hundreds of savings and loans across the country tipped into insolvency, the government encouraged them to try to make money by looking for better returns. This led them to make higher-rate loans to businesses and real estate companies and to invest in such instruments as mortgage-backed securities. When the Texas economy crashed in 1987, and along with it oil and real estate prices, many of these went sour too. As the crisis deepened, the headlines were dominated by a handful of colorful crooks, whose excesses had all been funded with government-insured deposits. The result was that government regulatory agencies began to assume that most thrifts had failed because of corruption.
United Savings was, by most accounts, one of the better-managed savings and loans in the state. While it wrestled with the same topsy-turvy economics that other thrifts did, it was singled out repeatedly by regulators as being better run than other S&Ls. Its management was so well regarded that other troubled financial institutions often asked it for help. Government regulators who were working on a plan to rescue the thrift industry in Texas both praised United’s management and promised that it would be a major factor in rescuing other, more-troubled thrifts.
These attitudes soon changed. By mid-1988 regulators who had called Hurwitz a “smart businessman” only two years before were referring to him as a “corporate raider” and criticizing United Savings for doing what they had once praised it for. For reasons that had to do entirely with redwoods, Hurwitz was becoming more and more politically incorrect. Congressman John Dingell now inserted himself into the investigation, writing to FDIC officials not to relax the rules in dealing with United Savings. United was placed under special supervision for “unsafe and unsound practices” and later on a “takedown list” of S&Ls to be seized. Its assets would be sold to the highest bidder.
Here again, redwood-tinged politics entered the equation. When the bidding opened for United Savings, Hurwitz, who still believed in its potential and had already twice pumped new capital into it, put in a sealed bid to buy it. The bid was rejected by bank regulators in spite of the fact that it was $100 million more than the winning bid. This illegal, politically inspired bid rigging would not be discovered until years later.
Instead of winning the bid as he should have in late 1988, which would have involved a large infusion of new money, Hurwitz was rewarded with a federal investigation: a full-scale probe, launched and vetted by the FDIC, by two law firms. When the probe was completed three years later, the lawyers reported that they had found no wrongdoing at all. Unhappy with this outcome, the FDIC hired another law firm to reinvestigate. “It spent the next two years interviewing—and coercing—former officers and directors,” said Hughes’s ruling, and in the end got a better outcome: The lawyers now said that the thrift’s board and management had been grossly negligent. The FDIC knew better; it still did not sue Hurwitz, because it didn’t have a case.
But that did not stop politicians and environmentalists from ramping up the pressure. Democratic congressman Henry Gonzalez, of Texas, the chairman of the House Banking Committee, wrote the FDIC to say he was frustrated that it had not yet sued Hurwitz. He said he was aware of the proposal to purchase the redwoods and suggested that the “principals” of Pacific Lumber had used Drexel bonds to buy it and had brought about the demise of United Savings. In November 1993 FDIC officials received a memo from an environmental group urging them to bring suit against Hurwitz for $548 million. The idea was that, to settle the suit, Hurwitz would have to give up his redwood trees. The memo included the admonishment: “Go get Hurwitz.” The radical group Earth First also contacted the FDIC, advocating “debt for nature and jail for Hurwitz.” In the Reagan-Bush years, these requests might have been ignored as the rantings of extremist environmental groups. But now Democrats were in power, and environmentalism was at the top of the Clinton administration’s political agenda.
Debt for nature, meanwhile, was quickly migrating from the backwaters of the Northern California environmental movement to the front burners of the White House and the Department of the Interior. It would become a sort of national movement, something that occupied Bill Clinton’s and Vice President Al Gore’s time and the time of many powerful people in Washington. What is interesting about this is that the idea of debt for nature itself was, while appearing to be clever and expedient, both legally flawed and profoundly impractical. Even if the government had a $548 million claim on Hurwitz, it was legally impossible for him to take the assets of one company in settlement of claims against another. If he had tried, Hurwitz would have been sued by Palco’s bondholders.
In Hurwitz’s office, I ask him if he knew the reason the FDIC kept extending its investigation of United Savings, which had been dragging on since 1989. “I didn’t know, not then,” he says. “It was a strange feeling, though, because at that point we were the only ones left. The FDIC had sued all the big banks and S&Ls in Texas, but not us. We were still sitting out there. They had been investigating us for years but hadn’t found anything. To my knowledge, it is the only case ever brought where they never accused me or anybody else of fraud, self-dealing, no yachts, no women, no big homes, no nothing. Pretty soon we figured out what was going on, but not then.” He says he knew of the massive environmental protests that were going on and of the concept of debt for nature. “But I had no idea,” he says, shaking his head, “that the White House would listen to that garbage.”
The FDIC, of course, was not just listening but actively working on debt for nature. This is evident in the stream of memos, letters, and meetings on the subject that was later uncovered by subpoenas and whose release was fiercely resisted by the FDIC’s lawyers, who continue to deny to this day that any of this happened. In a key meeting in February 1994, FDIC officials met to plot strategy with California Democratic congressman Dan Hamburg, who assured them that even though they did not feel they had a plausible case, they could win simply by scaring Hurwitz. If they could “convince the other side that we have a claim worth $400 million,” he argued, it “could be a hook into the holding company.” The Sierra Club soon weighed in, advising the FDIC on behalf of its 500,000 members that it ought to sue Hurwitz, followed by similar lobbying by seven environmental groups. Al Gore and California senator Barbara Boxer supported the plan. The Wall Street Journal reported that “the long-dormant investigation into the collapse” of United Savings was “heating up” because of debt for nature. Meanwhile, FDIC chairman Andrew Hove Jr. told the Sierra Club that “the redwoods might be brought into play.”
In May the FDIC did something it had never done before. Convinced that its own claims stood a poor chance of success in an independent federal court, the agency secretly hired its sister agency, the Office of Thrift Supervision, to investigate Hurwitz, with the plan that it would soon bring its own suit. The FDIC agreed to pick up the tab—illegally, as it turns out, since federal agencies are not empowered to redistribute funds they are allotted by Congress. According to Judge Hughes’s ruling, “If the FDIC had not suborned the OTS with its subsidy, OTS would have done nothing. Getting the OTS to participate was critical because the FDIC had no claim for United Savings’ failure.” The FDIC, now obsessed with the idea that it might be able to swing a major environmental victory, got even more involved. “Tactically,” reads one typical internal FDIC memo from that era, “combining FDIC/OTS claims—if they all stand scrutiny—is more likely to produce a large recovery/the trees than is a piecemeal approach.” The leading lawyers for the country’s principal bank regulatory agency were now spending large amounts of time and energy on redwood trees.
Their biggest problem was that, after more than five years of investigation, they still had not found a reason to sue. A remarkable July 1994 memo from outside counsel Thomas Hecht, of the firm Hopkins and Sutter, detailed the weakness of the case and his inability to show that Hurwitz had done anything wrong in connection with Michael Milken. The memo noted, however, that this angle might still be useful in smearing Hurwitz. “The Drexel connection with Hurwitz will, however, be of significant use in tainting the independence of [United Savings’] decision making process,” wrote Hecht. As the agency dithered, the political pressure mounted. Over the next year, there were increasingly frenetic meetings and communications between FDIC staffers and a widening circle of interested parties. By February 1995 ten major environmental groups and a handful of congressmen were pushing hard at White House chief of staff Panetta, FDIC chairman Ricki Tigert Helfer, and Senator Boxer.
Panetta, meanwhile, was openly promoting the idea of suing Hurwitz in order to make him give up his redwood grove, telling one environmental group that debt for nature was “worth pursuing,” especially in light of federal budget constraints. Memos were now astonishingly frank in advocating that the lawsuit be used simply as a means of frightening Hurwitz into cooperating. Clinton and Gore had both been briefed on the problem. More and more congressmen were now writing to the FDIC, wondering why it had not sued.
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