Reprint Paradise Lost? Part Four: The Headwaters Forest Land Swap

The Headwaters Forest Land Swap

I believe in the golden rule. He who has the gold rules.
—Maxxam CEO Charles Hurwitz after his corporate takeover of Pacific Lumber in 1985.

Maybe the bullet train and the Bay Bridge were predictable in their methodology and in their ability to produce profits from transportation projects, which are traditionally laden with pork, but that’s usually in the form of mega-million dollar construction projects, not through stock options based on the contracts called for in the legislation.

Usually, you have to build something to make millions; in the Transcam cases like the Bay Bridge and the bullet train, you don’t. You just issue the stocks. Voila! Instant money.

Although both the bullet train and the Bay Bridge produced some drama, it was nothing close to the sturm und drang of the Headwaters Forest.

This show had it all: heroes and villains, courtroom drama, high-level deal making and an eleventh-hour salvation of the symbol that galvanized the environmental community. That a young woman, Julia “Butterfly” Hill, had been cynically used as a pawn by insiders in the other, far quieter events surrounding Hill’s symbolic act of sitting in a redwood tree she named “Luna,” for over a year, was never reported. The Headwaters deal also included a pump-and-dump, and the deal was negotiated for the Bill Clinton and Gray Davis administrations by U. S. Senator Dianne Feinstein.

Sometimes life has an uncanny ability to imitate art, and in this part of the series we have a character who is the real-life counterpart of Wall Street’s Gordon Gekko, with his unscrupulous business practices, and rapacious desire for milking wealth from unsuspecting taxpayers and Mom-and-Pop shareholders. This man is Charles Hurwitz,  owner and CEO of the Houston-based Maxxam Corporation.

Hurwitz’s business style was revealed when he acquired a California-based company called Pacific Lumber in 1986. Pacific Lumber was an old North Coast logging company that owned the Headwaters’ virgin redwood forest. Hurwitz mined this prize stand of lumber to maximum effect by forcing a $700 million sale of Headwaters to the State of California in 1999. The sale preserved the trees, but at a price that many observers feel was highly over-valued. Since that deal in early 1999, Hurwitz, in true Gordon Gekko fashion, has torched Pacific Lumber, which is now in bankruptcy proceedings.

In Wall Street, when asked why he wants to wreck the company of his young informant’s father, Gekko replies, “Because it’s wreckable!”

Charles Hurwitz’s office is decorated with a large picture of a big fish swallowing a smaller fish. Maxxam’s takeover of PL was one of many in the 1980s. Under these deals a company buys another company and finances the deal using high-interest, high-risk loans called junk bonds. The assets of the company must then be sold or turned into profit very quickly in order to pay these high-interest loans. Maxxam’s takeover was financed by the notorious firm of Drexel Burnham Lambert, headed by Michael Milken.

There were many shady deals that went into this takeover, including insider trading (using secret information that is not available to the public) and having people secretly purchase and hold stock to avoid public reporting requirements. Several of the key players ended up going to prison for their roles in the PL takeover, or other financial dealings. However, their sentences are not like those given to regular people. For example, Boyd Jeffries, a financier who purchased 2.5 percent of PL stock for Hurwitz, pled guilty to several violations of federal regulations. His “penalty” was community service, teaching young people to play golf in Aspen, Colorado.

The story of Pacific Lumber is an instructive one in and of itself. For over a century Pacific Lumber owned Headwaters Forest and nearly 200,000 acres of redwood timberland in Humboldt County. They were the largest employer in the county, with their mill in Scotia as their main base of operations. In the early 1980s PL still owned healthy forests long after other timber companies had cut their holdings.

Compared to some of Hurwitz’s other deals the takeover of Pacific Lumber was relatively straightforward. Pacific Lumber’s stock did not reflect the real value of its assets, largely because the company was harvesting its timberlands at a conservative rate compared to other timber companies. Drexel had been unable to interest other buyers in Pacific Lumber largely because of environmental issues. It was clear to everyone, in advance, that in order to buy Pacific Lumber with junk bonds, the plan would have to include not just a higher rate of logging, but rapid destruction of rare old-growth redwood forests.

Pacific Lumber also had $65 million in a pension plan for its employees. After the takeover Maxxam used this cash for its own purposes.

Interestingly, the Securities and Exchange Commission, in September 1988, charged that Drexel forced its client, Maxxam, to pay an inflated price for Pacific Lumber Company. As outlined in the SEC lawsuit, on September 30, 1985, Maxxam made a tender offer for Pacific Lumber at $36 a share, and the same day demanded and received a 50% cut in Drexel’s fee. Then Ivan Boesky started to buy stock for Michael Milken at Drexel, without Maxxam’s knowledge, pushing the open market price of Pacific Lumber above the offer price. Maxxam raised its tender offer to $38.50 a share. On October 22 Maxxam increased its offer to $40 per share and Pacific Lumber capitulated.

Several other lawsuits attended the Pacific Lumber takeover, including one by the heirs of the family that had controlled Pacific Lumber, and one over the raid on the pension fund.

Pacific Lumber’s financial outlook is heavily dependent on the outcome of a variety of lawsuits and regulatory proposals, and the proposed deal for the California and Federal government to acquire a small part of the Headwaters forest area of Pacific Lumber’s timber holdings…According to Pacific Lumber’s SEC filing 10-K405 of 3/26/98, the long list of laws that must be complied with “have not had a significant adverse affect on its financial position, results of operations, or liquidity. However, these laws and related administrative actions and legal challenges have severely restricted the ability of Pacific Lumber to harvest virgin old-growth timber.” Pacific Lumber claims that these timberlands have been “taken” by California and the Feds, and Pacific Lumber should receive just compensation.

According to the same filing, Pacific Lumber and Maxxam entered into an agreement with the US and California which “provides a framework for the acquisition of approximately 5,600 acres of Pacific Lumber’s timberlands” known as the Headwaters Forest.

In 1997, Hurwitz’s corporation Maxxam reported a net income of $65.2 million, or $2.42 per share. Net sales for 1997 were $2.7 billion. Aluminum operations (Kaiser) created operating income of $174 million for 1997. Forest products operating income (Pacific Lumber) was $84.9 million. Real estate and other operations lost $5 million. Interest received was $50 million. Interest expense ($211 million) on junk bonds is the main reason the net income of Maxxam is far lower than the total income of its three types of operations. On April 3, 1998 Maxxam shares, traded on the American Stock Exchange, closed at $60 per share. In 1994 Texas Monthly Magazine reported Charles Hurwitz’s personal wealth to be estimated at $140 million.

Hurwitz also acquired United Savings Association of Texas (USAT) along with Milken and Co. Hurwitz was Chairman of the Board of the United Financial Group, whose main asset was USAT. USAT was heavily invested in highly risky junk bonds and speculative real estate, with 97 percent of it’s securities portfolio in junk bonds. When USAT collapsed in 1988, it would leave the federal government a $1.6 billion debt, the fifth largest bank failure in U.S. history.

Meanwhile, Hurwitz commenced liquidating PL’s assets to pay his huge loans. One of the first things that Hurwitz did was raid the PL pension fund. By “renegotiating” the pension fund with a company called Executive Life Insurance, Hurwitz and Maxxam were able to walk away with $55 million of the $65 million-dollar pension fund. Outside consultants recommended against placing the pension fund with Executive Life, which was financially unstable and heavily invested in junk bonds. In 1991, the California Insurance Commissioner seized control of Executive Life, in the largest insurance failure in U.S. history. According to the reorganization worked out by the insurance commissioner the PL retirement plan continued to pay benefits, but only at the rate of 70 cents on the dollar. Maxxam has promised to make up the difference. After the failure it was revealed that Executive Life held $350 million in Pacific Lumber junk bonds.

Of course the main asset that PL needed to turn into cash was its huge timber holdings, including the Headwaters Forest. Immediately after the takeover PL tripled its redwood logging, purchased a fourth lumber mill, and added an extra shift. The ancient trees began falling at an alarming rate.

As huge logging trucks began to clog the highways of Humboldt County, environmental activists began to organize against the devastation. Earth First! organized direct action to slow down the pace of the cutting and to bring public awareness to the issue. They strung a huge banner over Highway 101, busted into corporate meetings, staged “tree-sits” where activists sat on three-foot by six-foot platforms high up in the redwoods. They blocked roads, and chained themselves to machinery and to trees.

In 1996 California Senator Dianne Feinstein brokered a deal with Maxxam to trade $380 million in state and federal money for 7,500 acres of Headwaters containing two of the six ancient groves. Environmental activists denounced this deal, saying it was primarily set up to end the protests. They were right; it did end the protests, and the protestors helped make Hurwitz and Maxxam a billion dollar profit.

When the deal went through in 1999, the insiders sang hosannas to their successful effort to “save” the Headwaters. On March 1, 1999, the United States Bureau of Land Management and the state of California acquired the Headwaters Forest Reserve and surrounding lands totaling 7,400 acres in central Humboldt County. These newly acquired public lands are co-managed by the Bureau of Land Management and the California Department of Fish and Game. Their mission is to protect the ecological and wildlife values, particularly the old-growth redwoods that provide habitat for the threatened seabird, the Marbled Murrelet. The forest also protects the headwaters of several major stream systems in the Reserve, which provide habitat for the threatened Coho Salmon and other fish. The forest was a focal point of the largest environmental movement in recent years and is now owned by the Federal government.

The late David Brower was an environmental heavyweight who was one of the few to say the deal stunk from the head. Brower was a fighter and he had taken on the new board of The Sierra Club, which he once headed, accusing them of selling out. “They’re fiddling while Rome burns,” Brower told me when we met in Sacramento.

Brower had written a critical piece of the Headwaters deal in the San Francisco Chronicle’s December 23, 1998 edition, characterizing it as a half-billion-dollar government shakedown. “If we allow tycoons like Charles Hurwitz to exact hundreds of millions of dollars by staring down the government, more will line up behind him,” Brower warned. It was a prophecy that has since proved to be the case.

In his column on another land swap in the Sacramento Bee called “A Succession of Land Deals” published in March of 2001, Dan Walters wrote that the Catellus desert land swap amounted to a deal where “Catellus walked away with cash and valuable land and gave up virtually nothing of real value. It was a coup for the company’s top executive, Nelson Rising,” wrote Walters, who went on to state that the Catellus desert bill bore some similarities to the Headwaters Forest bill: both were used to appease environmentalists, those who favored the desert park and wanted to protect the desert tortoise, and those who wanted to preserve the virgin-growth Headwaters redwood forest.

Feinstein negotiated the Headwaters deal for the Clinton and Davis 

Administrations in the fall of 1998, right before she authored a new bill we will cover later in this blog. This bill was the Desert Wildlands bill. The Headwaters negotiations began in 1997. The company that owned Headwaters, Houston-based Maxxam Corporation, was trading at around $45 a share with volumes of 10,000 shares a day when the negotiations got underway. The deal went through March 1, 1999. The land transfers were administered by the Bureau of Land Management. The next day, Maxxam’s stock jumped nearly $9.89, to $57.69. That translated to $1,107,414 of profit in one day. That same day, 112,200 shares of Maxxam stock were traded. The two-day aggregate sales of Maxxam on March 1 & 2, 1999 totaled 252,000 shares that netted them $13,155,224. The one day increase in stock price multiplied by the outstanding number of stocks at the time equaled a cool $53,028,000. Insiders at Maxxam held over 50% of these stocks.

If we refer to Senator Feinstein’s official website on the Headwaters under the heading “Accomplishments”, she wrote “Between the years 1995 and 1999, I brought together officials from the Federal Government, the State of California, and the Pacific Lumber Company to negotiate a compromise agreement that protects the magnificent grove for all time. The Headwaters Agreement, provided for the Federal acquisition of the 7,500-acre Headwaters Forest from the Pacific Lumber Company, required that the Pacific Lumber Company’s entire 210,000 acres be governed by the terms and conditions of a Habitat Conservation Plan… protected 12 additional groves of ancient redwood trees, comprising over 8,000 acres, as habitat for the marbled murrelet; and provided habitat protection for the endangered coho salmon and other aquatic species.”

Senator Feinstein summed up this accomplishment by writing “I am very proud of this agreement because it saves all of the Headwaters Forest and all of the 12 lesser groves of ancient redwood trees. This is something that at the beginning of this process and even two years into the negotiations I didn’t think possible. The end result is a strong plan on which all of us will have to work closely together to implement satisfactorily.”