WHEN THE FEDERAL GOVERNMENT sued Houston financier Charles Hurwitz in 1995 for more than a billion dollars, it seemed to many people that one of America’s most corrupt and notorious businessmen had finally been run to ground. He was accused of looting one of the biggest savings and loans in the state, United Savings Association of Texas, whose 1988 failure had cost taxpayers $1.6 billion. It was the usual, dreary story of eighties-era chicanery, said the government’s lawyers: Hurwitz had invested in high-risk junk bonds in collusion with his pal Michael Milken, the convicted stock felon; gambled with depositors’ money; and enriched himself while the company suffered staggering losses. The size of the suit seemed to match the scope of the skulduggery: It was one of the biggest cases ever mounted by the government against a banker.

Nor were Hurwitz’s predations limited to the banking world. By the time he was sued for destroying United Savings, he had already established himself as the principal enemy of the environmental movement in the American West, which saw him as a sort of implacable, Mephistophelian corporate predator. The story goes like this: Wielding Milken’s bonds, Hurwitz had engineered the hostile takeover in 1986 of a family-run, environmentally friendly California timber company called Pacific Lumber, which owned the largest private stands of old-growth redwoods in the United States. In order to pay off his crushing junk bond debt, Hurwitz both raided the company’s pension fund and doubled the harvest of the ancient trees, heedlessly destroying forests, habitat, and endangered species. His strategy was to strip the company and its forests bare and ship the profits back to Houston.

If the “rape of the redwoods” story sounds familiar, that’s because it has been splashed in headlines across the country for the past twenty years. It has been featured in countless newspapers and magazines and on television shows such as 60 Minutes. If you have heard of the endangered spotted owl or seen pictures of protesters in redwood trees, it is almost certainly because of Charles Hurwitz. The stories told how Wall Street greed had turned chain saws loose upon the pristine, mist-shrouded forests of the Northwest, how a raider from Houston had ruined a great, iconic American company. The parable was so pointed, so neatly Manichaean, and so easily grasped that it was impossible to resist, and almost no one in the media could. That the government had fingered Hurwitz as one of the chief scoundrels of the savings-and-loan scandal only made the story better.

There was just one problem. It wasn’t true. Virtually every statement in the first two paragraphs of this story is false. Charles Hurwitz did not cause the failure of United Savings. He did nothing wrong at all, in fact: no fraud, no self-dealing, no mismanagement, not even what might loosely be construed as negligence. The media’s version of what happened at Pacific Lumber is likewise deeply flawed, as was the moral fable on which most of the stories were based. When Hurwitz bought the company, Pacific Lumber was not family run, nor was it especially environmentally conscious, and his takeover was in no way hostile. He did not, as dozens of major newspapers and magazines in the country had it, have to double his tree harvest to pay off his debt, nor did he do anything wrong with Milken’s firm, Drexel Burnham Lambert, or illegally drain the company’s pension or strip out profits and send them to Houston. He did nothing to trees and habitat and species that had not already been done by every other timber company in the Northwest, including Pacific Lumber.

His innocence did not protect him, however, from the longest and most expensive lawsuit ever mounted by the government in a banking case, one in which the twin bogus legends—redwoods and finance—became weirdly intertwined. There were two suits, actually, though both originated with and were coordinated by the Federal Deposit Insurance Corporation (FDIC), the agency that regulates banks. They lasted, from early investigation to final verdict, some seventeen years, produced more than two million pages of documents, and consumed more than $100 million in legal costs for both plaintiffs and the defense. The saga finally came to an end last August, when Houston federal judge Lynn Hughes wrote a blistering 133-page decision that assailed the FDIC’s staff “for its betrayal of public trust [and] its vindictive political assault on a private citizen” and called them “corrupt individuals within a corrupt agency.” For its actions, which Hughes said included perjury on a grand scale, the FDIC was slapped with an unprecedented $72 million sanction—the largest verdict ever against an agency of the United States government. “They were not content with stealing from Hurwitz,” wrote Hughes. “Through this case they sought to ‘cause him pain.’ They sought to humiliate him.”

Indeed, even more astounding than the size of the award was the ruling’s central thesis: that an arm of the government, backed by environmentalists and the Clinton administration, had brought a completely baseless suit against an American citizen whose sole purpose was to punish him financially and scare him into surrendering a forest of old-growth redwood trees. The scheme against Hurwitz even had a name: “debt for nature.” The FDIC would sue Hurwitz to create “debt” and then liquidate the debt by forcing him to give up his trees (“nature”). Such a political attack may seem implausible. In fact, the FDIC’s lawyers have repeatedly denied, under oath, doing any such thing, and its staff is forbidden to talk to the press on the grounds that legal action is still pending. Through spokesman David Barr, it would only say, “We believe the decision is incorrect on the law and on the facts and it will be reversed on appeal.” But an extraordinary cache of confidential memorandums, letters, and notes from inside the FDIC—uncovered during litigation and congressional hearings—shows precisely how the agency executed the plan. The documents reveal a tortured, labyrinthine, and almost surreal tale, one involving tree sitters, President Bill Clinton, White House chief of staff Leon Panetta, rock star Don Henley, a handful of prominent senators and congressmen, and the Secretary of the Interior, Bruce Babbitt. It is the story of a man who was harassed, demonized, and threatened with financial extinction by his own government in profoundly antidemocratic ways and who, with the entire might and muscle of the federal authorities ranged against him, fought back and won.

CHARLES HURWITZ IS A VERY, VERY PRIVATE MAN. To say that he avoids the spotlight is to grossly understate the matter. He loathes it. That is in part because most of the stories about him in the press have been sharply negative and in part because he is the sort of self-contained person who doesn’t really see why he should share his private thoughts with anyone else. Interviews with Hurwitz are extremely rare, and brutally brief. For a quarter of a century he has remained a mystery to the average reporter, a sort of informational black hole. And the less he has talked the easier it has become to portray him as a shadowy archvillain, as someone not quite human. I was therefore surprised when he agreed to be interviewed at length for this story. The occasion for such openness was Judge Hughes’s landmark award. But other events had helped put the wind at Hurwitz’s back. Hughes’s decision had been preceded by another federal court ruling that had absolved him of any wrongdoing or negligence at United Savings and a heavily documented congressional report detailing the FDIC’s debt-for-nature scam.

I meet Hurwitz in December in a small conference room at the headquarters of his Houston holding company, Maxxam. The office is distinguished by the absence of signs or markings of any kind. Like Hurwitz, the company craves anonymity. Hurwitz is 65 years old, six feet tall, bespectacled, and trim from tennis and regular gym workouts. He wears a dark, charcoal-stripe suit that would be considered conservative on Wall Street, and his personality seems to match it. I give him several opportunities to tell me how awful it was to be sued by the government for more than a billion dollars, how terrible and burdensome. But he won’t bite. If he feels the slightest amount of self-pity, he doesn’t show it.

“There are lots of kinds of lawsuits,” he explains eventually. “The worst of all is when the U.S. government is suing you, with its unlimited time and money. Worse still, they have a sister agency called the Office of Thrift Supervision that has its own judge and jury and can freeze your personal accounts. People can’t stand up to them. They can’t stand up financially or because of the pressure. Time doesn’t matter to the government. Money doesn’t mean anything.” I had expected someone with much rougher edges. Instead, Hurwitz is courtly, polite, and pleasant, so much so that I have to remind myself that this is the face that launched 10,000 demonstrations, a man so vilified that there is still a Web site called Jailhurwitz.com, where a reward of $50,000 is offered for information leading to his “arrest, conviction and jailing.”

To be sure, Hurwitz had earned his reputation. By the time he bought Pacific Lumber, in 1986, he had already established himself as one of the shrewdest takeover artists in the country and a man who seemed to create controversy wherever he went. He grew up in the fading oil boomtown of Kilgore, in East Texas, the son of a prosperous clothing store owner. He attended the University of Oklahoma and landed his first job as a broker for Bache Securities. While still in his twenties, he launched two successful mutual funds. The second—which he started in 1968 at the age of 28 with the backing of George Kozmetsky, a co-founder of Teledyne and later the dean of the business school at the University of Texas—was one of the first hedge funds and raised $54 million in its first offering.

He soon moved on. He caused his first controversy in the early seventies, when one of his companies was investigated by the Securities and Exchange Commission’s superintendent of insurance. The SEC accused him of filing false and misleading information related to a 1970 public offering. He signed a consent agreement, admitting no guilt. In 1973 he borrowed $12 million and bought a controlling interest in an undermanaged New York real estate company called Federated Development. He leveraged Federated into ownership of a much larger company, McCulloch Oil, a chain saw manufacturer and oil producer that also owned real estate in the West. He renamed it MCO Holdings, which later became Maxxam. A Maxxam subsidiary acquired Pacific Lumber. In 1988 Maxxam bought Kaiser Aluminum, the third-largest aluminum producer in the country.

As he built his empire, Hurwitz acquired a reputation as a tough, ends-driven operator, someone to be feared. There was something about him—some odd combination of quietude, an uncanny ability to see things others could not, and terrierlike tenacity—that made people distrust him. Or maybe it was just that aggressive, empire-building Texans were supposed to be loud, flamboyant types, and no one quite knew what to do with the cerebral, soft-spoken Hurwitz. He was shunned at McCulloch, which wanted nothing to do with him and tried, unsuccessfully, to fight him off. In 1984, when he made a run at old-line Hawaiian company Castle and Cooke, which owned Dole Pineapple and a lot of prime Hawaiian real estate, the company reacted in horror, obtained a restraining order, and ended up paying him a substantial greenmail premium to make him go away. In the early eighties he wanted to build a luxury residential resort in Rancho Mirage, in the Southern California desert. In the acrimonious battle that ensued, Hurwitz fought the city council and other residents (including Frank Sinatra) and won the right to build the resort, in part because he brought a $240 million suit against the city, threatening it with municipal bankruptcy. Hurwitz denies that he was the sort of investor who, as he says, “went in, took over a company, stripped the assets, and left.” But he clearly had dismantled the companies he had acquired, at least partially. That was part of the play.

In his office conference room, which overlooks the Houston Galleria, Hurwitz rocks back in his chair and talks about the great financial crisis beginning in 1980 that saw the failure of 1,617 banks and 1,295 savings and loans, including his own. “The FDIC sued everybody,” he says. “They went after banks in Houston and Dallas, where the best and the brightest of the city were on the boards, and they sued all of the directors. They accused them of everything, and everybody had to defend themselves and get their own lawyers. Everybody I know settled.” Not Hurwitz. He was the last of the thousands of bank executives and directors sued by the government in the civil courts, the only one who chose to fight to the death instead of settling. He spent ten years and the equivalent of $70 million battling the collective, inexhaustible legal resources of two powerful government agencies. I ask him why.

“I wanted to see it through,” he tells me in a soft voice inflected with an East Texas accent. “I always thought we would win, even though a lot of other people didn’t and nobody I know of had ever won against the [Office of Thrift Supervision]. We knew we were right.” There was another reason he did not settle, he says: He wanted to set an example and punish the people who had violated his rights. “What the government did was outrageous,” he says. “I don’t want anyone else to have to go through what I went through.” He is still visibly angry, indignant at the way he was treated. This is why he is talking to me.

  To understand why debt for nature became such a priority for the Clinton administration, you have to understand how Charles Hurwitz came to be regarded as the environmental Darth Vader of the Pacific Northwest. It all started in the fall of 1985, when he sniffed out one of the great, unheralded stock plays in America. Pacific Lumber—or Palco, as it is widely known—was ripe for a takeover. It was a sleepy, paternalistic 116-year-old American company, headquartered in picturesque Scotia, about four hours north of San Francisco. Scotia was the last true company town: Its rows of neat clapboard houses, schools, theater, hospital, recreation center, sawmills, and power plant all belonged to the timber company. What made Palco such a great deal were its depressed stock price and its management’s utter ignorance of how much timber it actually owned. Though the company had once been family controlled, family members no longer ran it and owned less than 5 percent of it, meaning that there was no major obstacle to buying it. After spurning Hurwitz’s initial bid, the company’s board accepted his offer of $40 a share, making it a friendly transaction. To finance his purchase, Hurwitz borrowed $750 million in the form of high-yield, or “junk,” bonds, underwritten by Drexel Burnham Lambert and its star financier, Michael Milken.

But Pacific Lumber did not turn out to be the sweet deal it had seemed. For all his shrewdness, Hurwitz had not foreseen the perfect storm of bad publicity that would soon catapult him into national headlines. Palco was not just any old widget maker. It owned 75 percent of the existing privately owned old-growth redwood trees in the United States. (Most of the remaining old-growth redwoods—81,500 acres, or 92 percent of the total—are in public parks.) These are special trees. They are magnificent and unearthly things that grow to a height of 350 feet and can live to be older than two thousand years. They form canopies so thick that sunlight hardly penetrates them. By the mid-eighties, “Save the redwoods” had become a rallying cry for the environmental movement, and growing numbers of people believed that cutting these ancient trees down to make deck furniture was morally wrong. Hurwitz had another problem: The blossoming national scandal on Wall Street involving insider trading, stock manipulation, and junk bonds zeroed in on Drexel Burnham Lambert and Milken, who would plead guilty in 1990 to securities fraud.

In June 1986, while these explosive issues simmered in the background, Palco’s managers unwittingly pulled the trigger. That month they filed papers showing that they intended to double the company’s annual timber harvest and also to rapidly harvest the old-growth redwoods. The reason: They had many more trees than the company’s previous managers had thought and thus could cut more of them and still obey state “sustainable yield” harvest limits. Both Hurwitz and his managers at Palco thought this was a perfectly reasonable idea.

What happened next was a political and media firestorm of astounding fury. Environmentalists looking for a cause célèbre had finally found one, and the perfect villain to match. A corporate raider, allied with the felons at Drexel Burnham Lambert, was going to chop down the last of the redwoods to satisfy Wall Street greed. By the summer of 1987, Palco was squarely in the national spotlight. Democratic congressman John Dingell, of Michigan, held a widely publicized hearing in Washington to look into whether Maxxam had engaged in stock manipulation or other illegal activities. Hurwitz was summoned and harshly chastised. Hearings were held that year in the California legislature, also driven by the idea that Hurwitz was illegally destroying a national treasure.

That summer there were protests in cities all across the country. In Houston demonstrators carried signs saying, “Hurwitz Is Destroying America.” In Manhattan protesters dressed up as owls and other endangered species. By 1990 the organized protest known as Redwood Summer had attracted thousands of activists to Scotia. Radical groups such as Earth First were not only sitting in trees to keep them from being cut down but also spiking them—a sometimes lethal means of sabotage that destroys the band saws at the sawmill. Lawsuits were filed by local groups like the Environmental Protection Information Center (EPIC), first simply to prevent logging and later to preserve endangered species such as the spotted owl and the marbled murrelet, who were said to require old-growth redwoods for nesting and breeding. (Studies would eventually show that claims that old-growth logging was driving spotted owls to extinction were uniformly false.)

Fueling these political fires was Palco’s often surly attitude toward such eco-interlopers as Earth First, the Sierra Club, and EPIC, in nearby Garberville. “They historically did things contrary to law and said, ‘Come get me,’” says Mark Stopher, a habitat conservation program manager for the California Department of Fish and Game. “They got their reputation the old-fashioned way. They earned it.” A good example of this was the so-called Thanksgiving Day Massacre of old-growth trees in 1992 at Owl Creek, near Scotia. Palco had filed for permission to cut, but in its hurry to cut logs before winter set in, it had not waited for all the required approvals. The result was a wave of negative publicity that seemed to confirm everything bad that protesters were saying about Palco.

What was really going on was a largely inaccurate propaganda campaign against Hurwitz and Palco, orchestrated by environmental groups and eagerly swallowed by reporters and editors. The myth relied on two narrative assumptions: first, that Palco had been an ecofriendly, family-run company that refused to harvest its old-growth redwoods out of the goodness of its heart and practiced only environmentally friendly logging; and, second, that because Hurwitz had loaded the company with Drexel-arranged debt, Palco had to increase its harvest of young and old trees to pay it off. Both assumptions were wrong. Palco was obviously neither well managed nor family run. But according to a 1996 study by two University of Southern California professors, pre-Hurwitz Palco would have cut down the oldest redwoods at a rate only slightly slower than Hurwitz. The study also found that Palco’s debt had nothing to do with the rate of harvest: The company could have paid the bonds off with no increase at all. Nor was the old Palco a paragon of ecofriendly logging: Its “selective” harvesting had been driven largely by California tax law.

Moreover, the plan to cut the old-growth trees simply followed existing company policy and the policy of every outfit that had ever logged the Northwest. One may disagree with the idea of cutting old redwoods down, as a matter of principle. Logging is a violent activity that leaves a devastated-looking landscape, destroys habitat, and can cause landslides, flooding, and silt runoff that clogs streams and interferes with the breeding of fish. Before the wave of new regulations in the seventies and eighties, logging was often brutally irresponsible, especially in its wanton destruction of creeks and rivers. But times had changed. Logging was now subject to strict environmental regulation, and Palco’s insistence that it had the right to cut those trees was fully in keeping with its legal authority and with industry practices in the Pacific Northwest.

As the battle was joined it became clear that it was being fought mainly over the largest stand of old-growth trees in private hands in America, a roughly three-thousand-acre parcel of land known as the Headwaters Forest. Though Palco had voluntarily accepted a moratorium on logging the Headwaters, it wanted to cut those trees down, while almost the entire environmental community in America wanted to save them. This impasse led to the evolution of two ideas that would animate the debate throughout the nineties. The first was that the government should buy the Headwaters Forest. The second was that the way to pay for the Headwaters was to sue Charles Hurwitz for the failure of United Savings Association of Texas—for which he was assumed to be responsible—and to use the presumed government victory in that civil action to force Palco to surrender its trees. This was what came to be known as debt for nature.

Around the time Hurwitz began battling with environmentalists in California, back in Houston he was experiencing the first major setback of his career. In December 1988 United Savings Association of Texas failed and was seized by banking authorities. At the time that it failed, Hurwitz-owned companies controlled just under 25 percent of the stock of its parent company, United Financial Group. When United Savings went down, it had $4.6 billion in assets and was the fifth-costliest thrift failure in the country.

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.

In July 1995, six and a half years after the investigation had started, Hurwitz precipitated a crisis by refusing to sign yet another agreement allowing the FDIC more time to pursue its case against him. The FDIC had thirteen days to decide either to sue him or give up its claim. At that point, Allen McReynolds, special assistant to the Secretary of the Interior, brought his agency’s considerable influence to bear. In an emergency meeting with the FDIC, he lobbied hard to sue Hurwitz, saying, “The administration wants to do the deal.” But in spite of such personal lobbying, the FDIC’s own lawyers still could not bring themselves to recommend suing. This is strikingly apparent in the draft of the FDIC’s own “authorization to sue” memorandum, dated July 24, 1995. In it, the FDIC’s deputy general counsel Jack Smith argues that “there is a very high probability that the FDIC’s claims will not survive a motion to dismiss” and recommends not pursuing a suit on the FDIC’s proposed claims. The chances, said the FDIC’s own lawyers, were roughly seven to one against winning. A week later, following an almost comical series of board meetings in which chairman Helfer personally leaned on the agency’s directors and the “authorization to sue” memorandum was rewritten so that it now recommended suing, the FDIC brought suit against Hurwitz for $250 million. It did so in strong language, vilifying him for failure to put money into the thrift as he had promised, manipulation of stock, illegal quid pro quo arrangements with Drexel, and reckless and negligent management.

Four months later, in December 1995, the OTS brought its own suit for $858 million, based on virtually the exact claims. It named not just Hurwitz but Maxxam, Federated Development, and five former directors of United Savings. The real difference, though—and this was the essence of the FDIC’s plan—was that the OTS’s suit would be tried in an administrative law court by a single judge who both worked for the OTS and had never ruled against it. (The FDIC would pay all expenses and get all proceeds of a victory.) As soon as the OTS sued, the FDIC backed off, seeking to stay its own case in Judge Hughes’s court. Hughes, smelling a rat and hounded now by Hurwitz’s lawyers, who realized that the OTS was secretly working for the FDIC, refused.

Over the next two years, as the trial cases heated up and lawyers burrowed furiously into the guts of the old savings and loan, pressure to make Hurwitz settle his claim by giving up his redwoods only intensified. The FDIC, realizing how bad it would look if people were to learn the real reason for its actions, clammed up in public and officially took the position that debt for nature had nothing to do with its suit. But privately its staffers continued to push its agenda. In one memo, FDIC assistant counsel Jeff Williams thought it would be a good idea to “tie him [Hurwitz] up in lengthy depositions” with a “moderately aggressive discovery plan of our own that inconveniences him.”

One of the more fascinating memos of that era was written by Kathleen McGinty, then the head of the White House—based Council on Environmental Quality—Clinton’s top environmental adviser. The memo was a briefing for Clinton’s September 1996 meeting with Don Henley, who was funding a series of ads in the New York Times advocating debt for nature. At one point, McGinty advises Clinton to tell Henley that “our goal is to acquire as much of the old growth redwoods as we can, but for now, our immediate focus is on the Headwaters Forest. However, much depends on the nature of our ongoing negotiations with Hurwitz.” Significantly, she advises the president to steer clear of actually endorsing debt for nature.

  The OTS trial took place in Houston and ran from 1997 to 1999, consumed 119 days in court, and produced two million documents, 30,000 pages of court transcripts, and 2,400 exhibits. Of the 119 days, almost all were taken up by the OTS’s presentation of its case. Hurwitz’s defense required only 12 days. The judge, Arthur L. Shipe, was known for never having ruled against the OTS in any banking-related case. No administrative law judge had ever ruled against the OTS, in fact. But this time his conclusions were unambiguous. In 2001 Shipe dismissed every claim the OTS had brought, peppering his 249-page ruling with such statements as “In one of its least responsible claims, Enforcement accuses Respondents of ‘stripping . . . USAT’s balance sheet of valuable assets to fund the expansion of Maxxam.’ . . . There is not a scintilla of evidence to support this sensational allegation.” Or, later: “I find it inconceivable that any regulatory agency takes this stance.”

There were no gray areas in Shipe’s decision, no close or agonizing calls. Its meaning was clear: The OTS had brought a completely baseless case. Of course, that’s exactly what the FDIC’s own lawyers had told its board in July 1995. Officially, Hurwitz settled with the OTS in 2002 for roughly $200,000 and change, admitting no guilt. Compared with the $858 million the OTS had sought, the amount was so small as to be meaningless—the equivalent of a couple of weeks of legal fees. Hurwitz effectively won the case outright.

If that wasn’t victory enough, a few months before Shipe’s ruling, the Committee on Resources of the U.S. House of Representatives had unleashed a scathing report, based on its December 2000 hearing and thousands of subpoenaed documents, on what committee staff members called “a federal plan to extort privately owned redwood trees.” The report was certainly political, the work of Republicans at whom Hurwitz had been hammering to help him thwart the Democratic conspiracy to strip him of his redwoods. Whatever the politics of the hearing, its subpoenas had produced a treasure trove of internal FDIC documents showing just how and why it had brought its case. In November 2002 the FDIC, sensing which way the wind was blowing, simply walked away from its case. But Hurwitz had no intention of dropping it. He counterclaimed, arguing that the FDIC had brought a wrongful suit and asking for monetary sanctions against the agency.

Perhaps the strangest aspect of the sanctions case was the FDIC’s refusal to admit that it had ever even considered taking part in anything like a debt-for-nature scheme. At both the congressional hearing and in Hughes’s court, FDIC lawyers—specifically general counsel William Kroener, staff attorney and lead United Savings investigator John Thomas, deputy general counsel Jack Smith, and liability section chief Jeffrey Williams—denied any involvement in such a scheme. Hurwitz’s counterclaim resulted in Judge Hughes’s groundbreaking $72 million ruling in August 2005. In it he accused the FDIC of lying and evading, of trying to keep from Hurwitz’s lawyers “every document showing the FDIC’s role in the plan,” and of switching numbers on document boxes to confuse the opposition. The FDIC has appealed the case to the Fifth Circuit Court of Appeals, which may rule on it this year. If it does, it will be only on the narrow question of whether the FDIC knew it was bringing a meritless case.

By the time Judge Shipe had ruled against the OTS and the FDIC had dropped its suit, thereby shutting down forever any hope of squeezing trees or money out of Hurwitz, the whole notion of debt for nature had become moot. In 1999, after negotiations led by California Democratic senator Dianne Feinstein to settle opposing lawsuits brought by the environmentalists and Hurwitz over the right to log, a final agreement was signed in which federal and state governments bought 7,500 acres—including the Headwaters—from Palco’s subsidiary Scotia Pacific for $480 million. While the FDIC and its political allies were busily scheming to strip Hurwitz of his trees through indirect means, the normal, constitutional process for taking land from an American citizen had already run its course. Hurwitz is reluctant to talk about the financial damage the FDIC and OTS lawsuits did to him, but he concedes that the government’s suit not only cost Maxxam a great deal of money but also hurt his ability to make money. “You go around and say to clients or investors or whoever, ‘Don’t worry about this billion-dollar lawsuit from the government,’” he says. “Maybe not everybody bought into that story. We were a lot more active in life before the lawsuit . . . And, look, I take things that aren’t great pretty well, better than most people. But no one enjoys this. No one likes this, saying you are raping trees and doing all of this stuff.”

Hurwitz’s friends say that he understates the damage. “The lost opportunities were substantial,” says close friend Bob Lanier, the former mayor of Houston, who advised Hurwitz on several occasions to settle. “Look at the company’s earnings before and after. Though he doesn’t show it much, it took a personal toll on him.” Says J. Livingston Kosberg, a Houston investor who once ran Gibraltar Savings and decided to settle rather than fight: “Fifteen years of struggling for a victory took a great deal out of him. The cloud over his head limited his ability to accomplish things he would have been able to accomplish.” Hurwitz’s empire is indeed a pale shadow of what it was before the lawsuits began. The prime example of this is Kaiser Aluminum, once his largest holding, with more than $2 billion in revenue, which went bankrupt in 2002. Though it is likely to emerge from bankruptcy this year, it is a total loss for Maxxam. The company was the victim of asbestos litigation (120,000 suits), rising retiree medical and pension liabilities, a weak aluminum market, and a general economic downturn after September 11.

Pacific Lumber, meanwhile, by far Hurwitz’s largest remaining asset, is beset again by environmentalists. As part of the Headwaters Agreement, Hurwitz and Palco had set aside nearly seven thousand acres of old-growth forests for fifty years and promised not to log where spotted owls and marbled murrelets nested or in areas prone to landslides or within 170 feet of streams and rivers. In exchange, Palco got money for the trees and promises that the company would be able to log a certain number of trees per year and that there would be a simplified, one-stop approval process. Most important, there was a federally guaranteed “no surprises” rule that said that no new laws would change the agreement. It was the most restrictive environmental agreement ever signed by a natural-resources company. Clinton and Hurwitz had each been involved in the negotiations, speaking personally by phone.

Still, many environmentalists hated the Headwaters Agreement and continued to fight it. The environmental lobby soon got state law changed so that California’s water agencies could overrule the deal. Palco was suddenly looking at a whole new set of water quality restrictions. Meanwhile, a federal court in Washington, D.C., threw out the no-surprises rule, and in 2003 a state court eviscerated the Headwaters Agreement’s habitat conservation and sustainable yield plans. Though the latter case was overturned on appeal, it has taken its toll on the company.

“Palco faces bankruptcy,” says a March 2005 company white paper, meaning that if it can’t pay the interest on its $774 million debt, its bondholders will soon take control of the company’s 216,000-plus acres of timberland. Maxxam would likely end up with the town of Scotia and the sawmills, in addition to its other holdings, which include several hundred million dollars of investments, real estate holdings in several states and Puerto Rico, and Sam Houston Racetrack, in Houston. But the company will be a fraction of what it once was. Hurwitz, bloodied but still optimistic, wants Palco to survive. “It is a great business model,” he says with a confident smile. “Great forests, great people.” How does he plan to solve the problems caused by the new water regulations? “We are going to do what we have to do,” he says. “We have a signed contract with the federal and state governments saying we can cut 176 million board feet per year. A signed contract. We also have a letter from the president of the United States, the Secretary of the Interior, and the governor of California saying that economics will overrule everything else to make it work.”

Soon after our interview, the company filed a lawsuit against the State of California for breaking the promises it made as part of the Headwaters Agreement. For Palco, and for Hurwitz, it seemed like a familiar place: sunk deep in litigation, with everything on the line.