[Congressional Record Volume 147, Number 83 (Thursday, June 14, 2001)]
[Extensions of Remarks]
[Pages E1123-E1136]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                        REDWOODS DEBT FOR NATURE

                                 ______
                                 

                         HON. RICHARD W. POMBO

                             of california

                    in the house of representatives

                        Thursday, June 14, 2001

  Mr. POMBO. Mr. Speaker, the staff report is entitled Redwoods Debt-
For-Nature Agenda of the Federal Deposit Insurance Corporation and the 
Office of Thrift Supervision to Acquire the Headwaters Forest. This 
report was prepared for the Committee to wrap up some oversight work on 
the FDIC and Office of Thrift Supervision redwoods debt-for-nature 
matter started during the last congress. The analysis concludes that 
there was a redwoods debt-for-nature scheme pursued by the bank 
regulators at the FDIC and the OTS beginning in at least February 1994. 
The startling part is that the banking claims against Mr. Charles 
Hurwitz (stemming from his minority ownership of a failed savings and 
loan) that were to be used a leverage to get Pacific Lumber Company's 
redwoods, a company owned and controlled by Mr. Hurwitz, were loser 
claims. By the FDIC's own internal evaluation, there was a 70 percent 
chance the claims would fail procedurally and more than 50 percent 
chance of failing on the merits.
  The conduct of the bank regulators was so bad that it led a U.S. 
District Court Judge, the Honorable Lynn Hughes to conclude that the 
agencies used tools equivalent to the cosa nostra--a mafia tactic--in 
their pursuit of Mr. Hurwitz and his privately owned redwoods. This 
staff report gives even more basis to validate the conclusion of the 
federal judge. No one-whether a millionaire industrialist or a laborer 
in a factory-should be subject to the unchecked tools of an out of 
control ``independent'' agency like the FDIC or the OTS. The redwood 
scheme grew as the FDIC understood the importance of its--and the 
OTS'--potential claims as the leverage for the redwoods during an 
extraordinary 1994 strategy meeting with a Member of Congress--19 
months before the claims were even authorized to be filed. The other 
bank regulator, the OTS, was enlisted by the FDIC right after that 
meeting. They were hired to pursue the same claims against Mr. Hurwitz 
administratively as leverage for their claims. FDIC's reason for 
teaming up with the OTS: to get ``the trees,'' according to the notes 
of their own staff.
  The redwoods scheme was introduced through an intense lobbying 
campaign by environmental groups, including Earth First! They 
penetrated the ``independent'' FDIC, the FDIC's outside counsel, the 
OTS, the Administration, the Department of the Interior, the White 
House, and Members of Congress.
  The FDIC (and its agent, the OTS) were the critical part of the 
scheme. The bank regulators were willing advocates who promoted a 
redwoods exchange for banking claims against Mr. Hurwitz well before 
the claims were authorized by the FDIC board, well before they were 
filed, and very well before Mr. Hurwitz raised the notion of redwoods. 
The evidence of the FDIC's participation in the redwoods scheme 
contradicts the testimony offered by the witnesses at the December 12, 
2000, hearing of the Committee Task Force. That testimony was that 
banking claims or the threat of banking claims against Mr. Hurwitz 
involving USAT were not brought as leverage in a broader plan to get 
the groves of redwoods from Mr. Hurwitz. The weight of the 
documentation contradicts that conclusion.
  The cost of bringing these claims that would have been ``closed out'' 
if it were the normal situation--is nearly $40 million to Mr. Hurwitz. 
One of two things needs to happen. We need to either have a hearing on 
this situation or the FDIC and OTS boards need to correct this action 
and revisit the underlying board actions that authorized the suits in 
the first place. I would be surprised if the FDIC and OTS board members 
actually knew what their staffs were doing with the redwoods scheme. I 
hope they would be surprised, but the evidence is now here for them to 
see. This is embarrassing to the bank regulators--they need to address 
it now.

       Redwoods Debt-for-Nature Agenda of the Federal Deposit 
     Insurance Corporation and the Office of Thrift Supervision to 
     Acquire the Headwaters Forest, June 6, 2001

                                Preface

                        Documentation References

       Documentation is referenced in parentheticals throughout 
     the text of this report. References to ``Document A'' through 
     ``Document X'' are references to documents that were 
     incorporated into the hearing record by unanimous consent by 
     the Task Force on Headwaters Forest and Related Matters on 
     December 12, 2000. These documents are contained in the files 
     of the Committee and those that are referred to are 
     reproduced in Appendix 1. Documentation referenced as 
     ``Record 1,'' ``Record 2,'' etc. is documentation found in 
     Appendix 2. Much of this documentation was not introduced as 
     part of the hearing record, and it is provided for reference 
     to substantiate key facts referenced in this report. 
     References to ``Document DOI A,'' ``Document DOI B,'' etc. 
     are references to documents that were incorporated into the 
     hearing record by unanimous consent of the Task Force on 
     December 12, 2000. These documents were produced to the 
     Committee from the Department of the Interior. Appendix 4 
     contains the correspondence between the Comntittee and the 
     bank regulators.
       All documentation referenced in this report and attached in 
     an appendix is necessary to contextually verify the 
     information and conclusions reached in this report on 
     subjects within and related to the jurisdiction of the 
     Committee on Resources. The records, documents, and analysis 
     in this report are provided for the information of Members 
     pursuant to Rule X 2.(a) and (b) of the Rules of the House of 
     Representatives, so that Members may discharge their 
     responsibilities under such rules.

Role of the Committee on Resources: The Headwaters Forest Purchase and 
                               Management

       Ordinarily, one would think that the Committee on Resources 
     does not regularly interact or have jurisdiction over bank 
     regulators. It is important to understand that the Committee 
     on Resources has jurisdiction over the underlying law that 
     initially authorized the purchase of the Headwaters Forest by 
     the United States and management of the land by the Bureau of 
     Land Management. That law was enacted in November 1997 and is 
     P.L. 105-83, Title V, 111 Stat. 1610. That legislation was 
     incorporated in an appropriations bill that funded the 
     Department of the Interior.
       Several conditions constrained the Headwaters 
     authorization. One of those conditions was that any ``funds 
     appropriated by the Federal Government to acquire lands or 
     interests in lands that enlarge the Headwaters Forest by more 
     than five acres per

[[Page E1124]]

     each acquisition shall be subject to specific authorization 
     enacted subsequent to this Act.'' This clause in the 
     authorizing statute is commonly referred to as the ``no 
     more'' clause, because it prohibits federal money from being 
     used to expand the Headwaters Forest after the initial 
     federal acquisition.\1\ This was part of the agreement 
     between the Administration and the Congress when funds were 
     authorized and appropriated for the purchase of the 
     Headwaters Forest. The federal acquisition actually took 
     place on March 1, 1999, the final day of the authorization, 
     at which time all federal activity to acquire additional 
     Headwaters Forest should have been dropped. Thus, the FDIC's 
     lawsuit and the OTS's administrative action should be 
     dropped.
       This statute, including the ``no more'' clause, is part of 
     the Committee's basis to compel bank regulators to provide 
     documents and testimony about subjects related to the 
     Headwaters Forest, debt-for-nature, redwoods, and related 
     subjects. The sheer volume of material possessed by the 
     banking regulators on subjects related to the Headwaters 
     Forest, possible acquisition of Headwaters Forest, and 
     redwoods debt-for-nature schemes provide more than adequate 
     basis for the Committee's jurisdiction over these agencies 
     about these subjects. Additionally, the banking regulators 
     have submitted themselves, properly, to the jurisdiction of 
     the Committee.
     Use of Records and Documents
       The FDIC and the OTS will undoubtedly complain that use of 
     some of the records and documents disclosed in this report 
     will jeopardize their case against Mr. Hurwitz, and that 
     certain litigation privileges or a court seal apply to the 
     documents; however, as stressed above, all documentation in 
     this report and attached in an appendix is necessary to 
     contextually verify the information and conclusions reached 
     in this report. The documentation directly bears on subjects 
     within and related to the jurisdiction of the Committee on 
     Resources.
       The records, documents, and analysis in this report are 
     provided for the information of Members. Informing Members 
     has legal basis in Article I of the Constitution and is 
     implied because Members of Congress need accurate information 
     to legislate. Indeed, the Committee has legislated on the 
     Headwaters Forest. Informing members also has legal basis 
     under Rule X 2.(a) and (b) of the Rules of the House of 
     Representatives. Members will be better able to discharge 
     their responsibilities under such rules after reviewing the 
     information in this report.
       Some may believe that litigation privileges might prohibit 
     use of the records not already part of the Task Force hearing 
     records. However, litigation privileges do not generally 
     apply to Congress. They are created by the judicial branch of 
     government for use in that forum. Assertions of any 
     litigation privileges by the FDIC or the OTS or Mr. Hurwitz 
     related to documents that are disclosed in this report may 
     still be made in the judicial forum.
       Committee staff has redacted sensitive information (for 
     example information unrelated to redwoods or debt-for-nature 
     and information involving legal strategy) of certain records 
     and documents to preserve the integrity of the judicial and 
     administrative proceedings. It is expected that the FDIC and 
     OTS may erroneously say that disclosure of certain documents 
     and records will undercut their litigation position. While 
     many of the documents and records disclosed may be quite 
     embarrassing to the bank regulators, embarrassment is no 
     basis for keeping the information about the unauthorized 
     redwoods debt for nature scheme secret. Some sunshine will 
     expose the unauthorized redwoods agenda of the bank 
     regulators in this case and sanitize the system in the 
     future.
     Background and Summary
       On December 12, 2000, the Task Force on Headwaters Forest 
     and Related Matters held a hearing that exposed an evolving 
     redwoods ``debt-for-nature'' scheme undertaken by bank 
     regulators--the Federal Deposit Insurance Corporation (FDIC) 
     and the Office of Thrift Supervision (OTS). Presented at that 
     hearing was substantial documentation and testimony showing 
     how federal banking regulators, swayed by an intense 
     environmentalist lobbying campaign, willingly became integral 
     to a ``debt-for-nature'' scheme to obtain redwood trees.
       In short, banking regulators provided the otherwise 
     unavailable leverage for a federal plan to extort privately 
     owned redwood trees. The leverage used was the threat of 
     ``professional liability'' banking claims against Mr. Charles 
     Hurwitz, a minority owner of United Savings Association of 
     Texas (USAT), a failed Texas savings and loan.
       Mr. Hurwitz was a favorite target of certain environmental 
     activists who wished to obtain the large grove of redwood 
     trees in northern California, redwoods that belonged to a 
     company, the Pacific Lumber Company, also owned by Hurwitz. 
     The environmental interests pressured Congress, the 
     Administration, and the banking regulators to bring the 
     banking actions against Mr. Hurwitz and USAT. The idea was 
     that the actions or threat of actions would lever or even 
     force Mr. Hurwitz into transferring redwood trees to the 
     federal government.
       The FDIC suit (Federal Deposit Insurance Corporation, as 
     manager of the FSLIC Resolution Fund v. Charles Hurwitz, 
     Civil Action No. H-95-3956) and the OTS administrative action 
     (In the Matter of United Savings Association of Texas and 
     United Financial Group, No. WA 94-01) against Mr. Hurwitz 
     actually became what the environmentalists and political 
     forces sought: the legal actions were the leverage for 
     redwoods.
       The bank regulators knew that their actions would be the 
     leverage for such a debt-for-nature transaction. Between late 
     1993 and when the actions were initiated,\2\ the bank 
     regulators became more and more enmeshed with the 
     environmental groups, the Department of the Interior, and the 
     White House in the redwoods debt-for-nature scheme. In the 
     end, they ignored every prior internal analysis indicating 
     that they would lose the USAT suit, so they teamed up and 
     brought it administratively and in the courts.
       Ultimately, the FDIC suit and their hiring of OTS to bring 
     the separate administrative action forced Mr. Hurwitz to the 
     negotiation table. The bank regulators, in concert with the 
     Department of the Interior and the White House, actually 
     baited Mr. Hurwitz into raising the redwoods issue first, so 
     it would not appear that the bank regulators were seeking 
     redwood trees.\3\ Indeed the bank regulators still try to 
     propogate the fiction that Mr. Hurwitz somehow raised the 
     issue first, but they can point to no document written 
     evidence prior to September 6, 1995, when Mr. Hurwitz finally 
     submitted and broached the possibility of swapping redwoods 
     for bank claims.
       After an intense banking regulator effort to get the 
     redwoods that lasted from 1993 through 1998, the federal 
     government and the State of California switched the plan and 
     purchased the redwood land owned by Mr. Hurwitz's company. 
     They did so as authorized by Congress (P.L. 105-83, Title V, 
     111 Stat. 1610).
       After the federal purchase, the residue was: (1) fatally 
     flawed banking claims that lacked merit; (2) bank regulators 
     standing alone having been used politically by the White 
     House and Department of the Interior; (3) a group of 
     environmentalists still screaming ``debt-for-more-nature;'' 
     (4) a federal judge who compared the tactics of the bank 
     regulators to those of hired governments and the ``Cosa 
     Nostra'' (the mafia); and (5) Mr. Hurwitz who was required to 
     spend upwards of $40 million to fight the scheme. In short, 
     the residue was a big mess.
       However, not until the oversight review and December 12, 
     2000, hearing of the Task Force did the banking regulators' 
     redwoods ``debt-for-nature'' motivation, which trumped their 
     own negative evaluation of the merits of their case, become 
     more fully understood.\4\ It was clear after the hearing that 
     the ``professional liability'' claims would have been 
     administratively closed--never even brought to the FDIC board 
     by FDIC staff for action--had Mr. Hurwitz not owned Pacific 
     Lumber Company and the Headwaters Forest redwood trees.
       Instead, intense political pressure, intense environmental 
     lobbying, and White House pressure to pursue the banking 
     claims as leverage for redwoods outweighed the standard 
     operating procedure to administratively close the USAT case, 
     because there was no USAT case. Two sets of banking 
     regulators--the FDIC and the OTS--became willing instruments 
     and partners in the debt-for-nature scheme as they violated 
     their own test for bringing ``professional liability'' 
     claims. Bank regulators brought the claims against Mr. 
     Hurwitz even though they were more likely than not to fail 
     and were not cost effective.
       The banking regulators' own assessment was that their 
     action would have a 70% likelihood of failure on statute of 
     limitation grounds alone. Even if the claims survive the 
     statute of limitation challenges, their own cerebral 
     assessment put less than a 50% likelihood of success on the 
     merits of their claims. These are not the conclusions of the 
     Task Force, although some Members may well agree with them; 
     they are the conclusions of the bank regulators themselves.
       Moreover, the bank regulators (OTS and FDIC) held numerous 
     meetings about the redwoods debt-for-nature scheme, and at a 
     critical juncture right before they reversed their 
     recommendation to the FDIC board, they met with DOI. The bank 
     regulators walked away from that meeting knowing that ``[i]f 
     we drop [our] suit, [it] will undercut everything.'' (Record 
     21). This is the meeting that most likely ensured that the 
     leverage for the redwoods desired by the DOI and the Clinton 
     Administration would become real through filing legal and 
     administrative actions.
       These contacts were far outside of normal operating 
     practice for banking regulators and were described by the 
     former Chairman of the FDIC as ``shocking'' and ``highly 
     inappropriate'' (Hearing Transcript, 43-44).
       In addition, the former FDIC Chairman told the Task Force 
     that environmental reference to redwoods does not have ``any 
     relevance whatsoever [on] whether or not you [the FDIC] 
     sue[s] Charles Hurwitz and Maxxam over the failure of United 
     Savings. Whether they own redwood trees or not is absolutely, 
     totally irrelevant.''--(Hearing Transcript, page 45). This 
     stinging rebuke from a past FDIC Chairman is a fitting 
     assessment of the actions of an agency caught up in a debt-
     for-nature agenda that was too big, too political, and too 
     unrelated to its statutorily authorized purpose.
       While there were many factors that nudged the FDIC, and by 
     association the OTS, into the debt-for-nature scheme--its own 
     outside counsel, the law firm of Hopkins & Sutter--

[[Page E1125]]

     provided early and direct links into the environmental 
     advocates who lobbied and advocated for federal acquisition 
     of the Headwaters Forest through a debt-for-nature scheme. In 
     fact, they were selected over as outside counsel other firms 
     because of their environmental connections and ability to 
     handle a redwoods debt-for-nature swap.
       In addition, the predisposition of the legal staff of the 
     FDIC and OTS, the strong desires of Department of the 
     Interior and the White House, the creative lobbying of the 
     Rose Foundation and the radical Earth First! protesters 
     (whose effect was felt and noted in the FDIC Board Meeting 
     discussions during consideration of the USAT matter) all 
     allowed the redwoods debt-for-nature scheme to pollute FDIC 
     and OTS decision-making about the potential claims over 
     USAT's failure. Very little if any documentation provided to 
     the Task Force justified, on a substantive basis, the 
     decision to proceed with the banking actions against Mr. 
     Hurwitz and the other USAT officers and directors.
       Redwoods and ``debt-for-nature'' were not part of banking 
     regulators decisionmaking or thought process early in the 
     investigation of possible USAT banking claims--from December 
     1988 through about August 1993. The notion was first 
     introduced to the FDIC in November 1993, when the redwoods 
     debt-for-nature proposal sent to them by Earth First! was 
     ``reviewed'' by FDIC lawyers. The first Congressional 
     lobbying of bank regulators promoting redwoods debt-for-
     nature occurred by letter on November 19, 1993. The first 
     known in-person lobbying of bank regulators by a Member of 
     Congress about potential claims of bank regulators being 
     swapped for redwoods occurred in February 1994. The tainting 
     of any possible legitimate banking claims began with the 
     occurrence of that very unusual meeting.
       The documents and records show how the redwoods debt-for-
     nature notion ultimately permeated bank regulators decisions 
     while they developed and brought their claims against W. 
     Hurwitz. As the claims were kept active during fourteen 
     tolling agreements between bank regulators and Mr. Hurwitz as 
     the leverage against him for redwoods using those claims was 
     applied. And when the claims were authorized and then filed 
     on August 2, 1995, the claims became more leverage.
       In the end, the evidence is clear that, but for the 
     environmentalists pressure to get redwoods through debt-for-
     nature and, but for Congressional pressure to get leverage on 
     Mr. Hurwitz to submit and give up his redwoods to the 
     government, the banking claims would not even have been 
     brought.
       Interestingly, it was unknown early in that process whether 
     a settlement for potential USAT claims would be viable at all 
     or include redwoods, or whether the government would possibly 
     purchase the redwoods. In any case, the threat of and actual 
     FDIC and OTS claims brought Mr. Hurwitz to the negotiating 
     table. Prior to the claims being filed, the FDIC conspired 
     with the White House and the Department of the Interior about 
     the importance and role of the banking claims to advance the 
     debt-for-nature redwoods agenda. The OTS was present during 
     some of those meetings and was reportedly ``amenable'' to the 
     redwoods debt-for-nature strategy.
       Even after the outright federal acquisition, which was by 
     purchase, the call became ``debt for more nature,'' \5\ 
     through a continued use of the bank regulators leverage of 
     suits that were in process already. The claims continued to 
     be used by the federal government to lever Mr. Hurwitz for 
     more nature, at that juncture arguably in violation of the 
     authorizing statute.\6\
       What remained at the end of the day were filed claims that 
     would not have been brought under ordinary circumstances had 
     Mr. Hurwitz not owned redwoods. The bank bureaucracy, with 
     its reason for bringing the claims in the first place having 
     evaporated, continued the fiction: they continued propagating 
     the false notion that redwoods and debt-for nature had 
     nothing to do with their bringing the USAT claims. Mr. 
     Hurwitz raised it first, they said, even as the FDIC told 
     Department of the Interior that they needed an ``exit 
     strategy'' from the redwoods issue. If redwoods had nothing 
     to do with bringing or pursuing the claims in the first 
     place, then there would be no need for an ``exit'' strategy 
     from the redwoods issue.
       The documentation discovered by Chairman Young and Task 
     Force Chairman Doolittle, which is explained in this report, 
     dispels the notion that Mr. Hurwitz raised the redwoods debt-
     for-nature first. To the contrary, the federal government, 
     bank regulators
       This report synthesizes records and information about the 
     redwoods ``debt-for-nature'' scheme of banking regulators, 
     the information subpoenaed from the FDIC and OTS, and the 
     information collected at the December 12, 2000, hearing of 
     the task force.
     Ordinary Role of the FDIC and OTS: Regulate Banks and Recover 
         Money
       As a starting point, it is helpful to understand the 
     ordinary and authorized role of bank regulators when 
     financial institutions fall. The FDIC is the independent 
     government agency created by Congress in 1933 to maintain 
     stability and public confidence in the nation's banking 
     system by insuring deposits. The FDIC administers two deposit 
     insurance funds, the Bank Insurance Fund for commercial banks 
     and other insured financial institutions and the Savings 
     Association Insurance Fund for thrifts.
       Other than its deposit insurance function, the FDIC is the 
     primary regulator for banks. It supervises, monitors, and 
     audits the activities of federally insured commercial banks 
     and other financial institutions. The FDIC is also 
     responsible for managing and disposing of assets of failed 
     banking and thrift institutions, which is what it did 
     concerning USAT, 24 percent of which was owned by Mr. Charles 
     Hurwitz. In connection with its duties associated with failed 
     banks, the FDIC manages the Federal Savings and Loan 
     Insurance Corporation Resolution Fund, which includes the 
     assets and liabilities of the former FSLIC and Resolution 
     Trust Corporation.
       The OTS is the government agency that performs a similar 
     function to that of the FDIC for thrifts insured through a 
     different insurance fund. The OTS is the primary regulator 
     for thrifts. The responsibilities of the FDIC and OTS overlap 
     in certain instances. The OTS has explained how the two 
     agencies divide those shared responsibilities: the FDIC 
     ``seek[s] restitution from wrongdoers associated with failed 
     thrifts'' and the OTS ``focus[es] on preventing further 
     problems.'' The USAT case is an exception to these stated 
     policies of federal institutions.
       Nowhere in the statutes authorizing the OTS \7\ or the FDIC 
     \8\ is there authority to pursue ``professional liability'' 
     claims or other claims for purposes of obtaining redwood 
     trees or ``debt-for-nature'' schemes. The sole purpose of 
     such actions with respect to failed institutions is to 
     recover funds or cash  not trees and not nature.
       The mission of recovering cash was acknowledged by the OTS 
     and FDIC. (See, Hearing Transcript, page 63, 64, Ms. Seidman 
     (OTS) answered: ``Our restitution claim is brought for 
     cash.'' Ms. Tanoue (FDIC) answered: ``[T]he FDIC considered 
     all options to settle claims, at the encouragement of Mr. 
     Hurwitz and his representative agency, looked at trees, but 
     the preference has always been for cash.'') Indeed, this may 
     be why the
     Chronological Facts and Analysis Regarding the FDIC and OTS 
         Pursuit of USAT Claims

  1986: Mr. Hurwitz Buys Pacific Lumber Company and Its Redwood Groves

       Mr. Charles Hurwitz owns Pacific Lumber Company. He 
     acquired it in a hostile takeover on February 26, 1986, using 
     high yield bonds. Pacific Lumber Company owned the Headwaters 
     Forest, a grove of about 6,000 acres of old redwood trees. 
     That property became desired by environmental groups because 
     of the redwood trees.
       After Mr. Hurwitz bought Pacific Lumber Company, he and the 
     company became a target of several environmental groups when 
     the company increased harvest rates on its land. Harvests 
     were still well within sustainable levels authorized under 
     the company's state forest plan, but harvest rates were 
     generally greater than prior Pacific Lumber Company 
     management undertook.
       Environmentalist publicly framed the Hurwitz takeover of 
     Pacific Lumber Company, as that by a ``corporate raider'' who 
     floated ``junk bonds'' to finance a ``hostile takeover'' of 
     the company to simply cut down more old redwood tree. It is 
     unclear whether framing this issue in such a way had more to 
     do with intense fundraising motivations aligned with certain 
     environmental groups described in the recent Sacramento Bee 
     series about financing the environmental movement 
     (www.sacbee.com/news.proiects/environment/20010422.html) or 
     more to do with ensuring that trees are not cut.
       At this juncture, Mr. Hurwitz and Pacific Lumber Company 
     were targets of environmentalists, but his opponents had 
     little leverage to stop the redwood logging on the company's 
     land other than the traditional Endangered Species Act or 
     State Forest Practices Act mechanisms.

    1988: Hurwitz's 24% Investment in Texas Savings and Loan is Lost

       Mr. Hurwitz also owned 24% of USAT, a failed Texas-based 
     thrift bank. The bank failed on December 30, 1988, just like 
     557 banks and 302 thrifts failed in Texas between 1985 and 
     1995 resulting from the broad-based collapse of the Texas 
     real estate market. As a result of the failure, the banking 
     regulators say they paid out $1.6 billion from the insurance 
     fund to keep the bank solvent and secure another owner. That 
     number has never been substantiated by documentation.
       Because Hurwitz owned less than 25% of the bank, and 
     because he did not execute what is known as a ``net worth 
     maintenance agreement,'' he was not obligated to contribute 
     funds to keep the bank solvent when it failed. Such 
     agreements (or obligations when a person owns 25 percent or 
     more of an institution) are enforced through what is known as 
     a ``professional liability'' action brought by bank 
     regulators.
       In certain cases, the FDIC and OTS are authorized by law to 
     bring to recover money is

[[Page E1126]]

     for the ``professional liability'' against officers, 
     directors, and owners of failed banks. The idea is to recover 
     restitution--money--it took to make failed institutions 
     solvent. This type of claim was brought against Mr. Hurwitz 
     by the bank regulators at OTS after they were hired to do so 
     by the FDIC. The nature of ``professional liability'' claims 
     are explained well in bank regulator's publication as 
     follows:
       Professional Liability [PL] activities are closely related 
     to important matters of corporate governance and public 
     confidence. . . . [They] strengthen the perception and 
     reality that directors, officers, and other professionals at 
     financial institutions are held accountable for wrongful 
     conduct. To this end, the complex collection process for PL 
     claims is conducted in as consistent and fair a manner 
     possible. Potential claims are investigated carefully after 
     every bank and savings and loan failure and are subjected to 
     a multi-layered review by the FDIC's attorneys and 
     investigators before a final decision is rendered on whether 
     to proceed. . . . (Managing the Crisis: The FDIC and the RTC 
     Experience 1980-94, published by FDIC, August 1998, page 266)
     Indeed, the bank regulators at the FDIC undertook an 
     investigation of USAT beginning when USAT failed on December 
     31, 1988, to determine what claims they might have against 
     USAT officers, directors, and owners.

              1989-September 1991: Investigation Continues

       The investigation of USAT proceeded, and interim reports 
     were issued by law firms investigating potential USAT claims 
     for the FDIC. Environmentalists initiated various non-banking 
     campaigns to block redwoods timber activities of Pacific 
     Lumber Company on their Headwaters land.

  October 1991-November 1993: Bank Regulators Find No Fraud, No Gross 
                 Negligence, No Pattern of Self-Dealing

       By October 1991, the bank regulators determined that there 
     was no ``intentional fraud, gross negligence, or pattern of 
     self-dealing'' related to officer, director or other 
     professional liability issues related to the failure of USAT 
     (Document B, page 7). They also determined that there was 
     ``no direct evidence of insider trading, stock manipulation, 
     or theft of corporate opportunity by the officers and 
     directors of USAT.'' (Document B, page 14). Bank regulators 
     said that the USAT ``directors' motivation was maintenance of 
     the institution in compliance with the capitalization 
     requirements and not self gain or violation of their duty of 
     loyalty.'' (Document B, page 17) There being no wrongful
       In spite of the determination that there was no basis to 
     file a claim regarding USAT, a determination that was unknown 
     to Mr. Hurwitz or the other potential defendants at the time, 
     the banking regulators and Hurwitz made numerous agreements 
     beginning November 22, 1991, expiring July 31, 1995, to toll 
     the statute of limitations. This gave the bank regulators 
     more time to investigate while they withheld filing of a 
     claim. These agreements are fairly routine in complex cases 
     like USAT.
       Beginning in August 1993 while the statute was still 
     tolled, several actions to attempt to acquire the Headwaters 
     Forest were taken in Congress and urged by environmental 
     groups. For example, on August 4, 1993, Rep. Hamburg 
     introduced a bill to purchase 44,000 acres (20%) of the 
     Pacific Lumber Company's land and make it into a federal 
     Headwaters Forest. In August 1993, the first contact between 
     the Rose Foundation (the primary environmental proponent of 
     advancing USAT claims against Hurwitz to obtain Pacific 
     Lumber redwoods) and attorneys for the FDIC was made.
       As early as November 30, 1993,\10\ FDIC attorneys were 
     aware of the Hamburg Headwaters bill and ``materials from 
     Chuck Fulton re: net worth maintenance obligation'' (Record 
     3A). The handwritten FDIC memo from Jack Smith to Pat Bak 
     notes that the professional liability section ``is supposed 
     to pursue that claim.'' It reminds her not to ``let it fall 
     through the crack!'' And if the claim is not viable, the 
     banking regulators ``need to have a reliable analysis that 
     will withstand substantial scrutiny.'' (Record 3A)
       Pressure to advance claims against Hurwitz in connection 
     with the redwoods in a debt-for-nature swap came in a variety 
     of forms to the FDIC. It first came from Congress on November 
     19, 1993, in a letter to the FDIC Chairman from Rep. Henry B. 
     Gonzolez, Chairman of the House Committee on Banking (Record 
     2). Numerous written Congressional contacts with the banking 
     regulators, most urging FDIC or OTS to bring claims against 
     Hurwitz occurred in late 1993 when the debt-for-nature scheme 
     was framed \11\ and subsequently over the years.
       On the same day, Bob DeHenzel, an FDIC lawyer, got an e 
     mail about a ``strange call'' regarding USAT (Record 1). It 
     was received by Mary Saltzman from a Bob Close,
       he [DeHenzel] had some knowledge of the nature of the 
     inquiry [by Mr. Close] as well as the attorney Bill Bertain 
     disclosed by Close. DeHenzel stated that this group was 
     involved in fighting a takeover action of some company by 
     Hurwitz involving forest property in the northwestern United 
     States. Apparently they are trying to obtain information to 
     utilize in their efforts. (Record 1)
       Then on November 24, 1993, Mr. DeHenzel, faxed a November 
     22, 1993, memo he received on November 22, 1993, from the 
     radical group Earth First! to another FDIC staff member. That 
     memo laid out the ``direct connection between the Savings and 
     Loans, the FDIC and the clearcutting of California's ancient 
     redwoods.'' (Document E) The memo introduced the concept that 
     the USAT ``debt'' (which were only potential claims that FDIC 
     internal analysis had already concluded had no basis) should 
     be traded for Pacific Lumber Company redwoods. An excerpt of 
     the memo lays out the scheme:
       Coincidently, Hurwitz is asking for more than $500 million 
     for the Headwaters Forest redwoods. So if your agency can 
     secure the money for his failed S&L, we the people will have 
     the funds to by Headwaters Forest. Debt-for-nature. Right 
     here in the U.S. That's where you come in. Go get Hurwitz. 
     (Document E)
       The FDIC apparently took Earth First! seriously. Within one 
     month, the FDIC lawyers reported to the acting chairman in a 
     memo that they were ``reviewing a suggestion by `Earth First' 
     that the FDIC trade its claims against Hurwitz for 3000 acres 
     of redwood forests owned by Pacific Lumber, a subsidiary of 
     Maxxam.'' (emphasis supplied) (Document G, December 21, 1993, 
     Memorandum to Andrew Hove, Acting Chairman, From Jack D. 
     Smith, Deputy General Counsel). \12\ The handwritten note on 
     the top of the page indicates that the acting chairman Hove 
     was orally briefed about the USAT situation prior to the 
     memo.
       Thus, well before Mr. Hurwitz raised the issue of redwoods 
     and debt-for-nature directly with the FDIC in August or 
     September 1996 \13\ with the bank regulators, its
       Then in the close of 1993, a press inquiry report to 
     Chairman Hove on debt-for-nature and the redwoods was 
     received and documented from the Los Angeles Times. The press 
     question was whether FDIC lawyers have considered whether 
     ``we could legally swap a potential claim of $548 million 
     against Charles Hurwitz (stemming from the failure of United 
     Savings Association of Texax) for 44,000 acres of redwood 
     forest owned by a Hurwitz controlled company.'' (Record 3B)
       The redwoods debt-for-nature scheme had been introduced via 
     these various venues during 1993. At the same time FDIC's own 
     analysis had shown absolutely no basis for a banking claim 
     lawsuit involving USAT. However, it was not until early 1994 
     when the FDIC and their agent, the OTS, adopted the redwoods 
     debt-for-nature scheme, and it became inextricably 
     intertwined in its USAT bank claims. Ironically, it was 
     political forces that enticed the bank regulators, who are 
     supposed to act on bank claims without political influence, 
     into wholesale and willing adoption of the redwoods debt-for-
     nature scheme.

   1994: Undisclosed Congressional Meetings Lobbying on the Redwoods 
                        ``Debt-For-Nature'' Plan

       By February 2, 1994, the FDIC attorneys knew the weakness 
     of several of its net worth maintenance claims and it 
     acknowledged that it ``can point to no evidence showing that 
     either UFG or Hurwitz signed a net worth maintenance 
     agreement'' (Record 5, page 6). They acknowledged the 
     weakness in a status memo (Record 5).
       As a result, the FDIC teamed up with the OTS to have OTS 
     attempt to construct an ``administrative'' net worth 
     maintenance claim against Mr. Hurwitz and his company that 
     owned the redwoods. They believed (but offered no proof that) 
     ``the actual operating control of [MCO, FDC, and UFG] was 
     exercised by Charles Hurwitz.'' (Record 5, page 9). In short, 
     FDIC did not have a claim, but the OTS may be able to bring 
     an action in an administrative forum \14\ that was much more 
     conducive to bank regulators, so the FDIC would hire the OTS.
       The net worth maintenance claim was important because if it 
     could be established on the facts (i.e., if Mr. Hurwitz owned 
     25 percent of USAT or he was somehow in control of USAT) it 
     could mean he would be liable for that percentage of the USAT 
     loss, which totaled $1.6 billion.\15\ In that way the bank 
     regulators could conceivably get into
       However, in written correspondence and at the Task Force 
     hearing on December 12, 2000--the FDIC and the OTS denied 
     that the litigation concerning USAT and Mr. Hurwitz had 
     anything to do with redwoods.\16\ They also denied that their 
     discovery tactics were improper or for the purpose of 
     ``harassment.'' \17\ One exchange at the hearing between Mr. 
     Kroener, the FDIC's General

[[Page E1127]]

     Counsel and Chairman Doolittle, however, typifies the 
     response to the question of whether the bank regulators' 
     litigation had anything to do with redwoods or leveraging 
     redwoods:
       Mr. Doolittle. . . . Did this litigation or discovery 
     tactic [harassment through discovery] have anything to do 
     with redwoods or the desire to create a legal claim to 
     leverage redwoods?
       Mr. Kroener. It did not. . . .
       (Hearing Transcript, page 99)
       While they have publicly denied any linkage, their own 
     written words show the opposite. There was indeed a scheme 
     involving politicizing bank claims against Mr. Hurwitz. Mr. 
     Kroener's answer and the repeated denials of a linkage is 
     purely wrong.
       A superb example of just how wrong Mr. Kroener's answer was 
     is contained in the previously unreleased meeting notes from 
     a February 3, 1994, meeting between FDIC legal and 
     Congressional staff and a U.S. Congressman. The redwoods 
     debt-for-nature linkage was the point of the meeting.
       The high ranking FDIC lawyers working on the redwoods 
     case--Mr. Jack Smith, FDIC Deputy General Counsel, and Mr. 
     John Thomas--and a Rep. Dan Hamburg \18\ met on February 3, 
     1994, to discuss the potential banking claims targeting Mr. 
     Hurwitz.\19\ (Record 2A).
       The fact that the meeting occurred at all--especially that 
     it occurred eighteen months prior to the USAT claim being 
     authorized or filed--and the notes from the meeting evince 
     that leverage for redwoods was promoted by FDIC lawyers. The 
     notes also show that the FDIC knew claims targeting Hurwitz 
     were invalid and probably could not be used as leverage 
     (Record 2A). Highlights of the Spittler (Record 2A, page ES 
     0509) meeting notes are as follows.
       Rep. Hamburg had ``an immediate interest in the case,'' 
     probably because he had a bill pending to purchase the 
     Headwaters, and the proposal from environmentalists in his 
     district to swap the Hurwitz banking claim ``debt'' for 
     redwoods had been generally floated. (Record 8A, The Humboldt 
     Beacon, Thursday, August 26, 1993, Earth First! Wants 98,000; 
     4,500 Acres Tops, PL Says.)
       According to Spittler's notes, which are Record 2A, Rep. 
     Hamburg said he was ``interested enough over potential filing 
     of the complaint to ask what is about to proceed.'' And 
     Hamburg [r]ealized that this possible avenue would be lost.'' 
     The ``avenue'' he was referring to was applying leverage 
     against Mr. Hurwitz for a redwoods debt-for nature swap, and 
     Jack Smith obviously understood this. According to Spittler's 
     notes, Smith replied, it is ``very difficult to do a swap for 
     trees,'' which means Smith knew that the authority of the 
     FDIC to recover restitution in trees was difficult or 
     impossible.
       Smith then told Hamburg about the USAT investigation: ``The 
     investigation has looked at several areas. [One c]laim [is] 
     on the net worth maintenance agreements.''\20\ (Record 2A) 
     The other FDIC attorney present, Mr. John Thomas, 
     acknowledged the fatal flaw of FDIC's claim: ``[There] have 
     been attempts to enforce this, [referring to the net worth 
     maintenance agreement.] Thomas then said, ``we can't find 
     signed agreement [between] FSLIC [and USAT/Hurwitz]. We never 
     found the agreement.'' Record 2A) Thomas was absolutely 
     correct--because there never was a net worth maintenance 
     agreement signed by Mr. Hurwitz.
       Besides the highly irregular nature of any communication 
     between the FDIC and anyone about a case under investigation 
     this communication is incredible for two reasons. First, it 
     shows the willful manner in which FDIC volunteered to get 
     involved in a political issue and mix potential claims with 
     the redwoods issue. The meeting notes prove that the FDIC 
     lawyers actually secretly briefed a Congressman about the 
     specifics of an ongoing investigation that would become mixed 
     with a political issue.
       Second, the timing of the Congressional strategy session 
     was eighteen months before the FDIC board had not even 
     approved filing a claim against Mr. Hurwitz--and its lawyers 
     were then discussing the specifics their investigation of a 
     potential claim in the
       discussions that occurred between FDIC staff and people 
     outside the Agency prior to and during litigation were 
     inappropriate. The fact that those discussions occurred 
     exposes the FDIC and the OTS to the charge that the 
     motivation for their litigation was to pressure Charles 
     Hurwitz and Maxxam to give up their private property, the 
     redwood trees owned by Pacific Lumber. . . . [T]heir repeated 
     contacts with parties with whom they have no business 
     discussing this litigation, congressional and administrative 
     officials and environmental groups, leaves them open to 
     whatever negative conclusions one might care to draw. 
     (Hearing Transcript, pages 15--16).
       Mr. Isaac noted the impropriety later again in the hearing.
       --that really would have shocked me as chairman to see the 
     FDIC staff having meetings with people outside the Agency 
     about the redwood trees, and . . . congressional officials 
     about a possible litigation we're thinking about bringing 
     involving redwood trees; you know, somehow tying these 
     redwood trees into it, and getting that mixed up in our 
     decision as to whether to bring a suit over the failure of a 
     bank. (Hearing Transcript, page 44-45)
       The content of the meeting between Hamburg, Smith (as 
     opposed to the fact that the meeting even occurred), is even 
     more appalling considering Jack Smith's next comment. 
     According to Spittler's notes, he said ``If we can convince 
     the other side [Hurwitz] that we have claim[s] worth $400 
     million and they want to settle, could be a hook into the 
     holding company.'' Of course, the ``convincing'' about valid 
     claims was the leverage, and the ``hook'' into the holding 
     company was getting company assets, including redwood trees. 
     This was redwoods debt-for-nature. FDIC was part of the 
     redwoods scheme.
       Not only does this show that the idea about debt-for-nature 
     was real to the FDIC lawyers, it shows when they promoted it 
     at a congressional meeting in February 1994, more than 18 
     months before the FDIC lawsuit against Hurwitz was even 
     authorized by the board and 17 months before, according to 
     Mr. Kroener's testimony, Mr. Hurwitz ``indirectly'' raised 
     the debt-for-nature swap with the FDIC through the Department 
     of the Interior. Contrary to Mr. Kroener's representations to 
     the Task Force, the FDIC legal
       The contents of the meeting shows irresponsible ends-driven 
     government, from almost any perspective. Mr. Smith was not 
     even talking about investigating and bringing valid 
     legitimate bank claims. He was only talking about 
     ``convincing'' Mr. Hurwitz that ``we have claims.'' This may 
     even be unethical, because he implied that an invalid, 
     unviable claim (the net worth maintenance claim) may be used 
     as leverage to get redwoods from Mr. Hurwitz.
       The FDIC is supposed to be an ``Independent agency,'' that 
     is, it is supposed to insulate itself from political pressure 
     and disputes. FDIC legal staff suddenly injected themselves 
     into a political issue of emerging national prominence 
     (redwood trees and debt-for-nature using banking claims), an 
     issue beyond the normalcy of banking recovery actions. The 
     meeting notes show that the FDIC attorneys engaged to promote 
     the issue of a debt-for nature swap, and that the design was 
     to merely ``convince the other side'' that the FDIC had 
     claims worth $400 million that the agency knew it did not 
     have. This is a sad, sad statement from an ``independent'' 
     government agency, and it is only the early part of the slide 
     for the FDIC.
       Buttress what the FDIC lawyers said in the February 1994 
     meeting to Rep. Hamburg about trees and claims, against what 
     Mr. Kroener and the other bank regulators told the Task Force 
     in sworn testimony:
       Mr. POMBO. Ms. Seidman and Ms. Tanoue, the FDIC and the OTS 
     have repeatedly said to the public and the Congress, 
     including this morning, that what the agency wanted from USAT 
     claims was cash, is that correct?
       Ms. Seidman. Yes. Our restitution claim is brought for 
     cash. As to any further discussions both relating to the 
     decision to bring the claim that way and subsequent 
     settlement discussions, none of which I took part in, I would 
     defer to Ms. Buck.
       Ms. Tanoue. I will also say that the FDIC considered all 
     options to settle claims, at the encouragement of Mr. Hurwitz 
     and his representative agency, \22\ looked at trees, but the 
     preference has always been for cash. . . .
       At a minimum, Ms. Tanoue is misleading. Eighteen months 
     prior to even having a claim to settle or having a claim 
     authorized or having a claim filed, her agency's top lawyers 
     were sitting in a Congressional office talking about 
     ``convincing the other side'' that ``we have claims worth 
     $400 million'' and getting a ``hook'' into a holding company 
     that owns redwoods.
       Mr. Pombo. At what point did you start looking at the other 
     options, and you mention trees?
       Ms. Tanoue. Much of this discussion occurred before my 
     tenure. I turn to Mr. Kroener for elaboration on that point.
       Mr. Kroener. . . . We were first offered trees or natural 
     resources assets by representatives of Mr. Hurwitz indirectly 
     in July of 1995.\23\
       There had obviously been a huge public debate going on 
     regarding this forest. We were not part of that \24\ but we 
     had lots of communications, others got lots of 
     communications, . . . [and our chairman and general counsel] 
     had responded to inquiries of Congress that were mindful that 
     trees could come into play in our claims, but our claims 
     didn't involve trees; they involved cash. (Hearing 
     Transcript, pages 63-65)
       Obviously their claims involved cash, because by law their 
     mission is to replenish the insurance fund with money. Mr. 
     Kroener was wrong when he said their claims did not involve 
     trees, and trees certainly came into play as evidenced by the 
     February 1994 the Rep. Hamburg-Smith-Thomas meeting. Indeed 
     trees were the motivating force that led the FDIC to promote 
     net worth maintenance claims to the OTS.
       The clear implication of Ms. Tanoue's answer is that Mr. 
     Hurwitz was the first to bring the redwoods into a possible 
     settlement, but we know that FDIC lawyers were scheming in 
     February 1994 with a Member of Congress to get a banking 
     claim ``hook'' into the redwoods holding company owned by Mr. 
     Hurwitz. Mr. Hurwitz was not the one who first brought the 
     redwoods into banking claim issue-the environmental groups, 
     FDIC lawyers, and certain Members of Congress had already 
     done so by that point.
       Perhaps W. Kroener did not read the meeting notes that he 
     provided to the Task Force

[[Page E1128]]

     about the February 1994 meeting between FDIC lawyers and Rep. 
     Hamburg when he told the Task Force that FDIC claims did not 
     involve trees until July 1995 when Mr. Hurwitz raised the 
     redwoods to the FDIC indirectly through the Department of the 
     Interior. The claims did involve trees--convincing the 
     ``other side'' that there is a $400
       As to Ms. Seidman, she stated a fact--that the OTS claim 
     was for cash, which is technically all that it could be for. 
     What she omits is that the FDIC had imparted the redwoods 
     debt-for-nature agenda directly to the OTS on the heels of 
     the February 3, 1994, meeting between FDIC and Rep. Hamburg--
     and the FDIC did so because its claims were too weak and too 
     small to provide enough leverage for the redwoods (See, 
     Record 33, Record 35 and accompanying discussion infra).
       It took less than 24 hours following the FDIC-Rep. Hamburg 
     meeting for the FDIC Deputy General Counsel, Jack Smith, to 
     write to Carolyn Lieberman (now Carolyn Buck), the top lawyer 
     at OTS. (Record 6). The letter (1) forwarded legal analysis 
     of the net worth maintenance claim against the Hurwitz's 
     holding company that owned the redwoods; (2) admitted that 
     FDIC had no net worth maintenance claim; (3) prodded OTS to 
     review whether it could administratively bring a net worth 
     maintenance claim; and (4) in an incredible admission of 
     purpose and intent, the letter notified OTS about the 
     redwoods debt-for-nature scheme. The last paragraph of the 
     one page letter reads:
       You should be aware that this case has attracted public 
     attention because of the involvement of Charles Hurwitz, and 
     environmental groups have suggested that possible claims 
     against Mr. Hurwitz should be traded for 44,000 acres of 
     North West timber land owned by Pacific Lumber, a subsidiary 
     of Maxxam. Chairman Gonzales has inquired about the matter 
     and we have advised him we would make a decision by this May. 
     After you have reviewed these papers, please call me or Pat 
     Bak (736-0664) to discuss the next step and to arrange 
     coordination with our professional liability claims. (Record 
     6)
       Clearly, this action, immediately after the FDIC strategy 
     meeting with Rep. Hamburg constitutes direct engagement of 
     the FDIC to promote the claim that would become the leverage 
     for the redwood debt-for-nature scheme.
       It is worth stressing that the FDIC that wrote this letter 
     on the heels of the Rep. Hamburg meeting is the same FDIC 
     that testified to the Task Force that their litigation did 
     not have anything to do with trees. How could it not when the 
     FDIC told the OTS that it promised Rep. Gonzalez that the 
     agency ``would advise him of its decision about an 
     environmental group suggestion ``that possible claims against 
     Mr. Hurwitz should be traded for 44,000 acres of North West 
     timber land owned by Pacific Lumber.
       This is debt for nature. It was real in February 1994. It 
     ultimately overrode the fact that the FDIC knew its claim was 
     weak and it led almost immediately to the FDIC hiring the OTS 
     to promote the net worth maintenance claim against Mr. 
     Hurwitz.
       This letter was sent three months prior to FDIC hiring OTS 
     to pursue the net worth maintenance claim that FDIC knew it 
     did not have.\25\ Importantly, it was sent
       In effect, the FDIC scheme beginning at least in February 
     1994, polluted the OTS action. What was a ``hook'' into the 
     ``holding company'' that owned the redwoods for FDIC, was a 
     ``hook'' into the holding company for the OTS. In fact, 
     without the FDIC money (which by 1995 totaled $529,452 and by 
     2000 totaled $3,002,825), OTS's five lawyers and six 
     paralegals advancing the claims against Mr. Hurwitz would 
     have been unfunded--and probably not advanced the claim. And 
     without the net worth maintenance claim--by far the largest 
     claim--there would be no hook into Mr. Hurwitz, therefore no 
     hook into his redwoods.
       It is helpful to understand why Mr. Smith told Rep. Hamburg 
     that it is ``very difficult to do a swap for trees.'' It was 
     very difficult for two reasons. First, the claims would not 
     ordinarily be brought because they would fail on the merits, 
     so it would be difficult to exchange a claim that would not 
     have been ordinarily brought. The bank regulators manual 
     explains their policies from 1980 through 1994 for bringing 
     claims as follows:
       No claim is pursued by the FDIC unless it meets both 
     requirements of a two-part test. First, the claim must be 
     sound on its merits, and the receiver must be more than 
     likely to succeed in any litigation necessary to collect on 
     the claim. Second, it must be probable that any necessary 
     litigation will be cost-effective, considering liability 
     insurance coverage and personal assets held by defendants. 
     (Managing the Crisis: The FDIC and the RTC Experience 1980-
     94, published by FDIC, August 1998, page 266)
       Second, the claims would be for restitution, and the FDIC 
     could not accept trees in settlement. The FDIC even admits 
     that they would need ``modest'' legislation to accept trees, 
     which is an admission that their purpose in seeking redwoods 
     is indeed unauthorized.
       However, it was political pressure, such as that applied by 
     environmental groups in 1993 and Rep. Hamburg beginning in 
     1994, that led the willing FDIC (and ultimately its agent, 
     the OTS, after FDIC began paying OTS in May 1994) into 
     ignoiing the mission of recovering money on cost effective 
     banking claims.
       Instead the FDIC adopted unauthorized missions of providing 
     leverage through lawsuits that are unsound on the merits and 
     would ``convince'' (the word used by Mr. Smith) Mr. Hurwitz 
     that FDIC had a claim of ``$400 million'' so that they could 
     get a
       February 2 through 4, 1994, were important redwoods debt-
     for-nature days for the FDIC's legal team. There was the FDIC 
     memo admitting that it had no net worth maintenance claim. 
     Then there was the meeting with Rep. Hamburg about the 
     redwoods scheme. Then there was an odd, but revealing e-mail 
     sent by FDIC's congressional liaison, Eric Spittler, to Jack 
     Smith on February 4, 1994, about a conversation he had with 
     Smith on February 3, 1994, the same day as the Rep. Hamburg 
     meeting. The message was about the selection of an outside 
     law firm to act as counsel on the USAT matter:
       Jack, I thought about over conversation yesterday. My 
     advice from a political perspective is that the ``C'' firm 
     [Cravath] is still politically risky. We would catch less 
     political heat for another firm, perhaps one with some 
     environmental connections. Otherwise, they might not 
     criticize the deal but they might argue that the firm 
     [Cravath] already got $ 100 million and we should spread it 
     around more. (emphasis supplied) (Document I)
     Indeed, ``environmental connections'' were a factor in 
     selection of the outside counsel for the USAT matter. A 
     February 14, 1994, memo about ``Retention of Outside 
     Counsel'' for the USAT matter (Record 15) from various FDIC 
     lawyers to Douglas Jones, FDIC's acting General Counsel, 
     trumpets the ability of the firm ultimately selected, Hopkins 
     & Sutter, to handle a redwood debt-for-nature settlement:
       The firm [Hopkins & Sutter] has a proven record handling 
     high profile litigation on behalf of the [FDIC] and, drawing 
     on its extensive representation of the lumber industry, will 
     be able to cover all aspects of any potentially unique debt 
     for redwoods settlement arrangements. (Record 15, page 8)
     The FDIC was clearly planning--even in February 1994 with the 
     selection of an outside counsel--for a redwoods debt-for-
     nature swap as part of a settlement! This was before they 
     even knew if their potential claims were really claims, and 
     before the FDIC Board had authorized filing of any claims. 
     From the FDIC's perspective, an outside counsel law firm with 
     ``environmental connections'' that can ``cover all aspects of 
     any potentially unique debt for redwoods settlement'' is the 
     only choice. (Record 15)
       So in February 1994, the FDIC--which denies to this day its 
     litigation against Mr. Hurwitz has any linkage to a redwoods 
     debt-for-nature scheme--selected the outside counsel for the 
     USAT matter because it could handle a debt for redwoods 
     settlement. This firm was an ideal choice for a bank 
     regulator with an agenda to get a ``hook'' into a holding 
     company that has redwood tree assets that might be traded for 
     bank claims--if they can ``convince'' the other side that 
     they have valid claims. Mr. Hurwitz's redwood
       The FDIC, its lawyers and acting chairman knew of the 
     linkage between bank claims and redwoods, as did their 
     outside counsel, Hopkins & Sutter, which even facilitated 
     numerous contacts, information exchanges, strategy sessions, 
     and meetings during the remainder of 1994 between the bank 
     regulators and environmentalist proponents of a Hurwitz debt-
     for-nature redwoods swap.
       But Ms. Tanoue and Mr. Kroener testified that redwoods had 
     nothing got do with the litigation, hardly an accurate 
     proposition in light of the fact that the FDIC's outside 
     counsel was selected because of their environmental 
     connections and ability to handle a ``unique debt for 
     redwoods settlement.'' (Record 15)
       Indeed, Hopkins & Sutter's ``environmental connections'' 
     paid off--to the environmentalists advocating a redwoods 
     debt-for-nature scheme. F. Thomas Hecht, the lead partner at 
     Hopkins and Sutter on the USAT matter, in a memo copied to 
     FDIC attorney's summarized the intense lobbying effort 
     [beginning in about March 1994] by certain environmental 
     activists led by the Rose Foundation of Oakland, California[, 
     whose] principal concern has been to conserve an area of 
     unprotected old-growth redwoods in northern California known 
     as the Headwaters Forest. (Document N, page 1) The memo 
     (Document N, page 3-4) details the following contacts:
       On June, 17, 1994, Thomas Hecht met with Jill Ratner of the 
     Rose Foundation in San Francisco for an initial meeting at 
     which Ms. Ratner outlined her groups' concerns.
       On October 4, 1994, Hecht, Jeffrey Williams, Robert 
     DeHenzel and the Rose Foundation and its lawyer participated 
     in a teleconference at which the claims prepared by the Rose 
     Foundation were presented in more detail.

[[Page E1129]]

       On January 20, 1995, DeHenzel and Hecht met with Julia 
     Levin of the Natural Heritage Foundation (``NHF''), a group 
     closely associated with the Rose Foundation. The NHF is 
     conducting much of the lobbying effort on behalf of the Rose 
     Foundation and other environmental activists on this issue.
       In addition to these more formal encounters, Williams, 
     DeHenzel and Hecht have each been contacted repeatedly by the 
     Rose Foundation and its attorneys to explore the theories in 
     more depth and to urge the FDIC to take action. In each of 
     these meetings and in subsequent telephone conversations and 
     correspondence, the Rose Foundation and its allies have urged 
     three general
       This is just a sampling of the many instances were the bank 
     regulators own notes and memos show integration between what 
     were still possible bank claims and the redwoods. All of 
     these occurred beginning 18 months before the USAT claims 
     against Mr. Hurwitz were authorized or filed. Record 8 
     contains several examples of outside contacts between bank 
     regulators and environmental groups about different 
     mechanisms to leverage redwoods using potential banking 
     claims.

 1995 The Federal Government Scheme Is Defined--``High Profile Damages 
           Case'' In Which Redwoods Are ``A Bargaining Chip''

       The relationship between the possible banking claims and 
     the redwoods is not just implied by the number of meetings or 
     the extensive evaluations by bank regulators and their 
     lawyers throughout 1994, it was directly stated in the March 
     1995 memo by F. Thomas Hecht, FDIC's outside counsel:
       As their theories have become subject to criticisms, 
     certain counsel for the Rose Foundation have shifted (at 
     least in part) from arguments compelling the seizure of the 
     redwoods to urging the development of an aggressive and high 
     profile damages case in which redwoods become a bargaining 
     chip in negotiating a resolution. This, indeed, may be the 
     best option available to the environmental groups; its 
     greatest strength is that it does not depend on difficult 
     seizure theories. This approach would require that both the 
     FDIC and OTS undertake to make the redwoods part of any 
     settlement package.\28\ (footnote not in original) (Document 
     N, page 8)
     Thus, the FDIC's outside counsel explained and evaluated the 
     best course of action for the environmental groups (never 
     mind the FDIC or the government). The fact is that a high 
     profile damage claim where redwoods were leveraged from Mr. 
     Hurwitz--the
       In spite of these facts, the FDIC has consistently insisted 
     since late 1993 that ``there is no direct relationship 
     between USAT and the Headwaters Forest currently owned by 
     Pacific Lumber Company . . . [however], if such a swap became 
     an option, the FDIC would consider it as one alternative . . 
     .'' (Record 28). Indeed, this is exactly what the banking 
     regulators have told the Committee in writing: they have 
     always been open to the idea, but they prefer cash. The 
     documentation outlined above shows that the banking 
     regulators actively pursued a redwoods debt-for-nature agenda 
     using their claims as urged by certain Members of Congress 
     and by environmental groups. However, by this point, the 
     Department of the Interior and the White House had yet to 
     engage. That changed in early 1995.
       In February 1995, a host of environmentalists proposed an 
     acquisition of the Headwaters redwood trees to President 
     Clinton, and Leon Panetta (Chief of Staff) wrote back to them 
     saying that budget constraints would not permit outright 
     acquisition (Record 16A). He suggested that they push a debt-
     for-nature swap or land exchange instead. That action served 
     to lower expectations for appropriated funds for the 
     redwoods, and focused the proponents on continuing to push 
     the redwoods debt-for-nature scheme.
       By April 3, 1995, FDIC lawyers were openly attempting to 
     leverage Mr. Hurwitz into settling claims that were still yet 
     to be filed for redwood trees. The redwoods debt-for-nature 
     scheme was alive and active at the FDIC as indicated by the 
     words in this e mail to Mr. Jack Smith from Mr. Bob DeHenzel:
       Jack:
       Just a note regarding our brief discussion on Charles 
     Hurwitz and exploring creative options that may induce a 
     settlement involving the sequoia redwoods in the FDIC/OTS 
     case: . . . (Record 9)

     In these words the FDIC's attorneys were indeed leveraging 
     redwoods by using their banking claims--at least three months 
     before FDIC says that Mr. Hurwitz raised the redwood-debt-for 
     nature idea through his ``representative agency'' (presumably 
     the DOI), attorneys, four months before the FDIC board 
     authorized the suit against Mr. Hurwitz, and about five 
     months before the FDIC maintains Mr. Hurwitz raised the 
     redwoods swap idea directly with the bank regulators.
       Thus, well before the notion of the redwoods debt-for-
     nature deal was introduced to the FDIC by Mr. Hurwitz (as the 
     bank regulators religiously maintain) the bank regulators 
     were indeed targeting Mr. Hurwitz's redwoods and using their 
     potential claims as leverage to ``induce'' a settlement. The 
     repeated statements and the sworn testimony of
       The notes of FDIC attorneys about what they were seeking 
     and why the FDIC and the OTS were cooperating also contradict 
     the testimony of the bank regulators when they say that 
     redwoods had noting to do with the litigation against Mr. 
     Hurwitz. Sometime in mid-1994 (but before July 20, 1994) 
     \29\, FDIC wished to continue studying their claim and ``a 
     possible capital maintenance claim by OTS against Maxxam.'' 
     In illuminating candor, the handwritten memo articulates why 
     the FDIC lawyers wanted to hire the OTS and double team Mr. 
     Hurwitz:
       Why?
       (1) Tactically, combining FDIC & OTS' claims--if they all 
     stand scrutiny--is more likely to produce a large recovery/
     the trees than is a piecemeal approach (Record 10, bates 
     number JT 000145)

     So, the senior FDIC lawyer, Mr. John Thomas, 
     contemporaneously wrote that their strategy with OTS would be 
     more likely to produce ``the trees.'' But their Chairman, 
     their General Counsel, and the OTS Director repeatedly told 
     the commiittee that the litigation had nothing to do with 
     trees. Were the FDIC and OTS management and their board 
     members so ill-informed about what their attorneys were 
     seeking to achieve? ``The trees'' is not cash, period.
       The other very alarming notion is how integral OTS is to 
     the strategy to ``produce'' ``the trees,'' according to the 
     FDIC attorneys. The strategy to ``combine'' FDIC's weak 
     claims with possible OTS claims on net worth maintenance 
     further explains the February 4, 1994, letter from FDIC's 
     lawyers to OTS's lawyers (Record 6).
       It transmitted the net worth maintenance claim to the OTS 
     and introduced the notion that the FDIC was considering a 
     redwoods debt-for-nature swap scheme. The FDIC told OTS that 
     they were about to report to Rep. Gonzalez about the 
     potential for the swap. The implication was that viable 
     claims against Mr. Hurwitz (brought directly by the FDIC or 
     indirectly through the OTS) would allow the FDIC to report 
     back to Mr. Gonzalez that they could help get ``the trees'' 
     because a swap would be more viable. Without the OTS, the 
     FDIC would not have enough leverage to produce ``the trees,'' 
     because by its own analysis, the FDIC claims were losers.
       The repeated intra-government lobbying of FDIC and OTS also 
     pushed the bank regulators into the political redwoods debt-
     for-nature acquisition scheme. This intragovernment lobbying 
     began indirectly by at least May 19, 1995,\30\ and is first 
     evidenced
       The notes (Record 11) indicate that Ms. Ratner told Mr. 
     DeHenzel about the Department of the Interior (DOI) players 
     who are ``very interested in debt-for-nature swap'': Mr. Alan 
     McReynolds, a Special Assistant to the Secretary of the DOI, 
     Mr. Jeff Webb, with DOI congressional relations, Mr. George 
     Frampton, the Assistant Secretary for Fish Wildlife, and 
     Parks at DOI, and Mr. Jay Ziegler, an assistant to Mr. 
     Frampton were all discussed as redwoods debt-for-nature 
     advocates. And Record 11A illustrates that the Rose 
     Foundation had done substantial work regarding various 
     mechanisms to transfer the redwoods to the federal 
     government.
       The notes indicate that Mr. McReynolds had flown over 
     Headwaters during the week of May 8, 1995, \31\ with Ms. 
     Ratner a primary advocate of various plans to acquire the 
     Headwaters Forest. This was the first indication that DOI was 
     engaging on the redwoods debt-for-nature scheme and probably 
     Mr. McReynolds' first exposure to the concept that bank 
     claims could provide the leverage for the redwoods scheme. 
     There is no mention in the notes that Mr. Hurwitz requested 
     DOI to raise the issue of a redwoods swap or look into it:
       Interior is . . . discussions will continue. Webb & Zeigler 
     will continue doing prelim[inary] work to explore whether 
     debt-for-nature would work. (Record 11)
       By the time that the DOI engaged in May 1995, the FDIC 
     lawyers were well aware of the `` `debt-for-nature' 
     transaction that various environmental groups have been 
     advocating to resolve the claims involving Hurwitz and 
     USAT.'' (Record 12) They were also apparently intimidated by 
     the environmentalists as shown by the two page FDIC memo 
     about a redwoods debt-for-nature letter to FDIC referencing 
     the Oklahoma City bombing and a ``call to defuse this 
     situation'' by doing a swap (Record 12). The following

[[Page E1130]]

     excerpt of the memo shows detailed knowledge about the debt-
     for-nature scheme and a perceived threat of violence related 
     to environmentalist who had pushed the FDIC into it:
       As you know, the above-referenced investigation has 
     resulted in attracting the attention of organizations and 
     individuals that have interests in environmental 
     preservation. This has arisen as a result of Charles 
     Hurwitz's acquisition (through affiliates) of Pacific Lumber, 
     a logging company in Humbolt County California, that owns the 
     last stands of old growth, virgin redwoods. \32\ It has been 
     widely
       The environmentalist's issues are centered on preserving 
     the old growth redwoods through a mechanism of persuading 
     Hurwitz to settle the government's claims involving losses 
     sustained on the USAT failure by, in part, transferring the 
     redwood stands to the FDIC or other federal agency 
     responsible for managing such forest lands. FDIC has received 
     thousands of letters urging FDIC to pursue such a 
     transaction.
       The environmental movement, like many others, is not 
     homogeneous and contains extreme elements that that have 
     resorted to civil disobedience and even criminal conduct to 
     further their goals. As a result of the recent tragedy in 
     Oklahoma City, everyone appears more sensitive to the 
     possibility that people can and do resort to desperate, 
     depraved criminal acts. Accordingly we take any references to 
     such conduct, even ones that appear innocent, more seriously. 
     (Record 12)
       This excerpt shows that FDIC attorneys were (1) probably 
     somewhat intimidated and (2) already well-versed in the debt-
     for-nature scheme when Ms. Ratner told Mr. DeHenzel who the 
     DOI players supporting the redwoods debt-for-nature scheme 
     were. The FDIC was keen to the motivations and methods of 
     those who fed the scheme to them. Perhaps the intimate 
     knowledge by the FDIC of the interests and desires of the 
     environmental community came through the numerous pieces of 
     correspondence and legal memos from the Rose Foundation to 
     the FDIC through Hopkins & Sutter.\33\ The material showing 
     the constant pummeling of FDIC by these advocates (and the 
     willing acceptance by the FDIC and its outside law firm with 
     ``environmental connections'') is too voluminous to 
     reproduce. It is contained in the Committee's files.
       With the FDIC primed, the Department of the Interior 
     directly engaged with the FDIC. The first known direct 
     contact was a 5:00 p.m. call on July 17, 1995, from Alan 
     McReynolds to Robert DeHenzel.\34\ The notes taken by 
     DeHenzel (Record 16) indicate
       The following day, DeHenzel consulted about the McReynolds 
     inquiry with ``JVT,'' John V. Thomas, the same FDIC lawyer 
     who attended the Rep. Hamburg meeting in November 1993. Mr. 
     Thomas told him to talk to Jack Smith and Alice Goodman. The 
     notes say that ``JVT's reaction--Smith & Goodman should be 
     there with us'' (Record 16) for the meeting with McReynolds.
       Then the unexpected occurred. On July 20, 1995, Mr. Hurwitz 
     refused to extend the statute of limitations tolling 
     agreement with the FDIC (Record 17, See, footnote 1 on page 
     2). He had last done so on March 27, 1995, and that extension 
     was to expire on July 31, 1995. As a result, any lawsuit by 
     FDIC regarding USAT claims against Mr. Hurwitz were required 
     to be filed by August 2, 1995, just thirteen days later. It 
     was just three days after Mr. McReynolds contacted the FDIC 
     for a meeting about the potential FDIC and OTS actions 
     against Mr. Hurwitz that the FDIC was told that Mr. Hurwitz 
     would not extend the tolling agreement.
       The FDIC was unprepared for this action. They had enjoyed 
     six years and eight months of discovery during which they 
     were lobbied by outside groups and Members of Congress on the 
     completely unrelated issue of pursuing the redwoods debt-for-
     nature swap. However, the agency had failed to do its job and 
     cobble together enough evidence supporting a banking claim 
     involving USAT and Mr. Hurwitz. They were not ready to file a 
     complaint or drop the case on their own volition, even though 
     Mr. Hurwitz provided voluminous records to the agency in the 
     discovery process, records that defined the facts and 
     illuminated issues raised by the FDIC.
       As a result, the FDIC was facing two issues--the request 
     for a meeting with the Office of the Secretary of the DOI and 
     the need to address the fact that they did not have the USAT 
     case prepared after more than six years of investigation.
       They addressed these issues internally in a July 20, 1995, 
     meeting between ``Mr. Jack Smith, JVT [John V. Thomas, FDIC 
     lawyer], MA [Maryland Anderson, FDIC lawyer], JW [Jeff 
     Williams, FDIC lawyer], and Robert DeHenzel.'' (Record 18)
       It is clear from this meeting that the FDIC lawyers were 
     not anxious to recommend a lawsuit against Hurwitz. They did 
     not have a case, because it did not meet their internal 
     standards. Instead they prefer-red to hinge their action on 
     whether OTS brought the administrative action, the action 
     that they prompted and paid OTS to bring against Hurwitz. 
     This is an odd trigger for an agency that does admits it does 
     not have a case, disavows it seeks redwoods, and is only 
     interested in receiving ``cash.''
       Thus, the FDIC lawyers'' behavior is somewhat 
     schizophrenic--on the one hand they know their internal 
     policies will not let them bring a suit, but on the other 
     hand they want to sue Mr. Hurwitz (and not other potential 
     defendants). They then begin constructing the justification 
     for doing so around the notion that the potential claims 
     against Mr. Hurwitz are somehow special-not ``ordinary.'' 
     They also apparently talk of telling Mr. McReynolds what they 
     will do--evidence of further improper coordination with the 
     DOI outside of normal FDIC operating parameters. Mr. Thomas' 
     notes from the internal FDIC meeting (Record 18) explain:
       Re: McReynolds-Kosmetsky-Hurwitz-Tolling
       Jack [Smith]--we will not go forward if OTS files a case--
     if OTS does not file suit, we still have to decide our case 
     on the merits before tolling expires
       *Memo to the GC [General Counsel] to Chairman--update 
     status of case & recommends that we let Kozmetsky out.
       If suit against Hurwitz--we sue only him and not others
       Find out if Hurwitz will toll
       Write a memo on case status to GC 10 page memo should do 
     it! continue tolling sue or let them go
       If ordinary case, we do not believe there is a 50% chance 
     we will prevail therefore, we cannot recommend a lawsuit.
       McReyonlds-handle same as the Hill presentation (Record 18)
       Clearly, the thinking coming out of the July 20, 1995, 
     meeting was that the FDIC lawyers were not ready to make a 
     recommendation on the merits of the case. Continued tolling 
     was not an option because Mr. Hurwitz refused to sign a 
     tolling extension, so the options ``sue or let them go'' were 
     the only viable options. If it were an ordinary case the 
     preference at that point would be to close the case out--that 
     is let them go.
       FDIC lawyer, Mr. John Thomas' later notes outlining some 
     points for that memo to the General Counsel tell us why this 
     was not the ``ordinary'' case:
       ``[G]iven (a) visibility--tree people, Congress & press . . 
     . we thought you--B[oar]d--should be advised of what we 
     intend to do--and why--before it is too late.'' (Record. 22)

     What Mr. Thomas was saying is that the staff intends to close 
     out the case, and if the FDIC board wants to do otherwise 
     before the case is closed (administratively by the staff or 
     by virtue of the statute of limitations running), then the 
     Board must intercede.
       Importantly, the FDIC lawyers deviated from ordinary 
     operating procedures because of the intense lobbying campaign 
     for the redwoods debt-for-nature swap. Clearly, the intense 
     lobbying effort by the environmental groups, by their outside 
     counsel, by the DOI, by the White House, and by other federal 
     entities was effective! At that point the bank regulators 
     bought the redwoods scheme, but were unprepared then to 
     totally disregard there what they knew they should do under 
     their rules and guidelines, so the staff punted the issue to 
     the board.
       The FDIC had already injected itself into a political 
     issue. Their dilemma was summed up by Mr. Thomas in notes 
     preparing for a discussion on the USAT claims with the board 
     apparently scribed a few days later:
       Dilemma (why they [the FDIC Board] get paid the big 
     bucks)--take:
       Hit for dismissed suit
       Hit for walking based on staff analysis of 70% loss of 
     most/all on S of L [statute of limitations]

     (Record 23)
       The action by the FDIC of treating this case differently 
     than the ``ordinary'' case and the concerted manipulation of 
     hiring the OTS to pursue parallel claims to be used as 
     leverage sends the strong message: if someone wants to 
     influence bank regulators on an entirely collateral issue, 
     and politically manipulate the bank regulators, they can 
     successfully do it.
       All that must be done to use the bank regulators to achieve 
     a collateral issue is to pursue two year public relations 
     campaign aimed at them, swamp the bank regulators with cards 
     and letters about the collateral issue, write and submit 
     various legal briefs for them that link the collateral issue, 
     meet with the bank regulators about the collateral
       Indeed, the redwoods debt-for-nature swap became linked to 
     USAT and Mr. Hurwitz just as the environmental groups wished. 
     This was not the ordinary case--it was going to the FDIC 
     Board even though the FDIC admitted their case had a 70 
     percent chance of being dismissed because of the statute of 
     limitations, and was more likely than not of falling on the 
     merits if they were reached.
       Apparently, the FDIC legal staff was prepared to tell 
     McReynolds and ``the Hill''

[[Page E1131]]

     [Congress] the same thing--their course of action described 
     in the July 20, 1995, meeting notes (Record 18). This 
     modified procedure still left the door open for the board to 
     act against staff recommendations and authorize the suit 
     anyway--something that may not have been ideal from Mr. 
     McReynolds perspective, but would still leave open the 
     possibility of the leverage that DOI desired against Mr. 
     Hurwitz.
       Then something else changed on July 21, 1995, which was the 
     day following the internal FDIC meeting on their potential 
     claims against Mr. Hurwitz. The change caused the entire 
     approach of the FDIC lawyers to evolve again. What changed 
     was not any new information about the facts of the potential 
     claims against Mr. Hurwitz related to USAT. What changed was 
     not any favorable development in law that strengthened their 
     potential claims against Mr. Hurwitz related to USAT. What 
     changed was not any analysis about the nature or strength of 
     the potential claims against Mr. Hurwitz. All of these things 
     remained the same.
       What changed was the realization by the FDIC lawyers, as 
     communicated by a senior DOI official, that (1) the Clinton 
     Administration and the DOI, had adopted and embraced the 
     redwoods debt-for-nature scheme and they wanted the scheme to 
     be successful, and (2) the FDIC's potential banking claims 
     were critical to pulling off that redwoods debt-for-nature 
     scheme. The potential banking claims--the same claims that 
     the FDIC lawyers would have dropped using ``delegated 
     authority''--were the leverage that were critical to making 
     the redwoods debt-for-nature scheme work.
       That realization occurred when the FDIC lawyers met with 
     Mr. McReynolds on Friday, July 21, 1995, at 11:00 a.m. 
     (Record 19), just as he had requested on Monday, July 17, 
     1995. Meeting notes indicate that background about the 
     redwoods and endangered species issues associated with the 
     Mr. Hurwitz's redwoods \36\ were initially discussed (Record 
     20). Other background about Governor Wilson's task force and 
     the willingness of California to participate in the deal were 
     discussed, as were Mr. Hurwitz's
       H[urwitz] values 8K [acres] at $500 m. Interior wants to 
     deal it down. H[urwitz] really wants $200m total. Calif. 
     Deleg[ation] is really putting pressure on. Dallas/Ft. 
     Worth--Base closure \37\
       The FDIC also told McReynolds about the meeting that FDIC 
     lawyers had set for the following Wednesday, July 26, 1995, 
     with the OTS to discuss the USAT matter. They told Mr. 
     McReynolds about the fact that they were doing the memo to 
     the Chairman (the 10 page memo they concluded they needed in 
     their July 20, 1995, meeting amongst the FDIC lawyers, See 
     Record 18). The entry regarding this in Record 20 is 
     reproduced below:
       Wed [July 26] 10:30 mtg w/OTS. Memo for Chairman. (Record 
     20)
     Eric Spittler's notes from the July 21, 1995, meeting add 
     helpful details, and they are reproduced below:
       $400,000 expenses on OTS \38\
       Have not decided whether to bring case--won't decide for 
     months.\39\
       Alan McReynolds--Adm[instration] want to do deal
       Gov. Wilson w/DOI had task force of 6 groups
       Told to find a way to make it happen
       CA will trade $100m in CA [California] timber
       Adm[instration] might trade mil[itary] base \40\
       Had call from atty. Appraisal on prop[erty] for $500m. Said 
     they want to make a deal. \41\ Don't know how much credence 
     we have from them about a claim. At
       If we drop suit, will undercut everything. (emphasis 
     supplied)
     (Record 21)
       So, the FDIC knew--according to the meeting notes--that if 
     the FDIC dropped the suit by letting the statute of 
     limitations run, ``it will undercut everything'' related to 
     the redwoods scheme that was just discussed with McReynolds. 
     In other words, letting the statute of limitations expire--
     the ``ordinary'' procedure and recommendation of the FDIC 
     lawyers at the time--meant the leverage for the redwoods 
     debt-for-nature deal would evaporate, as would the scheme to 
     get Hurwitz's redwoods. Thus, the notes confirm a redwoods 
     debt-for-nature scheme and that FDIC did not really know 
     whether Mr. Hurwitz believed that the FDIC had a valid 
     claim--further evidence of the fact that the claims were 
     indeed weak substantively and procedurally.
       In this context--where the FDIC knew its claims (and the 
     claims it was paying OTS to pursue) were the essential 
     leverage for the redwoods--the FDIC lawyers began drafting 
     the memo. Clearly, the agency was struggling with the fact 
     that dropping the claims was inconsistent with what the DOI 
     and the Administration needed to accomplish the redwoods 
     debt-for-nature swap.
       The handwritten outline of Mr. John Thomas (Record 22) 
     reviewed the major points in the contemplated for the memo to 
     the Chairman. The outline reiterated the linkage between FDIC 
     and OTS, and it reinforced staff conclusion that the USAT 
     claims against Mr. Hurwitz should be left to expire otherwise 
     the court would dismiss them. Mr. John Thomas' outline 
     clearly show that if this case were ``ordinary'' it would be 
     closed. Pressure for redwoods was the justification for 
     informing the Board of the staff's intent to close out the 
     case, and the option of pursuing the case for purposes of 
     leverage was therefore left open. Mr. Thomas' outline, which 
     appears to be composed for the 2:00 p.m. briefing of the 
     Chairman on July 26, 1995, (Record 22) is partially 
     reproduced below--
       May recall briefed re OTS--[FDIC is] paying [the OTS]--some 
     months ago.
       OTS is making progress, but not ready. Thus, tolling again.
       OTS staff hopes to have draft notice of charges to Hurwitz, 
     et al. Aug-Sept.
       (Apologize for short fuse)--we thought we would be able to 
     put off a final decision until OTS acted. Hurwitz refused to 
     toll.
       Normal matter, we would close out under delegated authority 
     w/o [without] bringing it to your Bd's attention.
       However, given
       (a) visibility-tree people, Congress & press
       (b) [OMITTED] we thought you--Bd--should be advised of what 
     we intend to do--and why--before it is too late.

                           *   *   *   *   *

       Bottom line: likely to lose on S of L [statute of 
     limitations]--let it go or have ct. dismiss it.
       Continue to fund OTS
       We'd also write Congress re what & why rather than awaiting 
     reaction
       Redwood Swap--
       Interior/Calif.
       Forest--[military] base--FDIC/OTS claim(?)
     (Record 22)
       This outline reinforces the approach and dilemma described 
     by FDIC lawyers in their July 20, 1995, meeting. First, there 
     was coordination with the OTS claims to get redwoods. That's 
     because FDIC's possible claims were losers on substantive and 
     procedural (statute of limitations) grounds. Second, ordinary 
     procedures to close out the matter were circumvented due to 
     ``visibility'' from the redwoods debt-for-nature campaign of 
     the ``tree people'' (Earth First! and the Rose Foundation), 
     Congress, and the press. Third, the Department of the 
     Interior's ``Redwood Swap'' was taking shape and FDCI lawyers 
     were beginning to coordinate with DOI staff.
       All these factors combined to override the normal course of 
     action, which was to close out the case. Instead, the Board 
     would get the decision. All of this confirmed in John Thomas' 
     own handwritten outline (Record 22), and all of it adding up 
     to show that the redwoods debt-for-nature scheme had a real 
     impact on the approach of the FDIC's lawyers. It had yet to 
     skew the FDIC's final judgment based on early versions of the 
     memo to the Chairman (Document X), but the final version 
     dated July 27, 1995, would reflect skewed judgment.
       The memo was drafted, and a version reflecting Mr. Thomas' 
     notes and all of the prior internal staff discussions was 
     produced and dated July 24, 1995. The drafts are Document X, 
     and the final before the reversal is Document X, pages ES 
     0490-0495. It contains an unsigned signature block. 
     Highlights of this memo are reproduced below and they tell 
     exactly what the FDIC lawyers would advise the FDIC Board:
       We had hoped to delay a final decision on this matter until 
     after OTS decides whether to pursue clams against Hurwitz, 
     et. al. However, we were advised on July 21, 1995 that 
     Hurwitz would not extend our tolling agreement with him. 
     Consequently, if suit were to be brought it would have to be 
     filed by August 2, 1995. We are not recommending suit because 
     there is a 70% probability that most or all the FDIC cases 
     would be dismissed on statute of limitations grounds. Under 
     the circumstances the staff would ordinarily close out the 
     investigation under delegated authority. However (evidenced 
     by numerous letters from Congressmen and environmental 
     groups), we are advising the Board in advance of our action 
     in case there is a contrary view. (Document X, page ES 0490)
     And in discussing the merits, the memo again advised:
       The effect of these recent adverse [court] decisions is 
     that there is a very high probability that the FDIC's claims 
     will not survive a motion to dismiss on statute of 
     limitations grounds. We would also be at increased risks of 
     dismissal on the merits. Because there is only a 30% chance 
     that we can avoid dismissal on statute of limitations 
     grounds, and because even if we survived a statute of 
     limitations motion, victory on the merits (especially on the 
     claims most likely to survive a statute of limitations 
     motion) is uncertain given the state of the law in Texas, we 
     do not recommend suit on the FDIC's potential claims. 
     (Document X, page ES 0493-0494)
       The memo then discusses the redwood forest matter, an 
     interesting notion given the fact that the FDIC has 
     consistently maintained that the redwoods were not at all 
     connected to their litigation:
       The decision not to sue Hurwitz and former directors and 
     officers of USAT is likely to attract media coverage and 
     criticism from environmental groups and member of Congress. 
     Hurwitz has a reputation as a corporate raider, and his 
     hostile takeover of Pacific Lumber attracted enormous 
     publicity and litigation because of his harvesting of 
     California redwoods. Environmental interests have received 
     considerable publicity in the last two years, suggesting 
     exchanging

[[Page E1132]]

     our D&O [director and officer] claims for the redwood forest. 
     On July 21, we met with representatives of the Department of 
     the Interior, who informed us that they are negotiating with 
     Hurwitz about the possibility of swapping various properties, 
     plus the possibility the FDIC/OTS claim, for the redwood 
     forest. They stated that the Administration is seriously 
     interested in pursuing such a settlement.\42\ This is 
     feasible with perhaps some new modest legislative authority. 
     . . . We plan to follow up on these discussions with the OTS 
     and Department of [the] Interior in the coming weeks. . . . 
     When the Hurwitz tolling agreement expires, we would 
     recommend that we update those Congressmen who have inquired 
     about our
       It is helpful to understand that there were four major 
     versions of this memo drafted and revised. The drafts of this 
     memo are all type-dated July 24, 1995, and they all reference 
     discussions with the Department of the Interior. These drafts 
     are Document X, which was made part of the Task Force hearing 
     record by unanimous consent.
       However, one version of this memo contains numerous 
     handwritten changes, including a date that was changed from 
     July 24, 1995, to July 27, 1995 (Document X, pages PLS 
     000192-000195). The changes amount to the complete and total 
     reversal in approach to the USAT claims related to Mr. 
     Hurwitz. The July 27, 1995, version is the text that was 
     incorporated into the Authority to Sue (ATS) cover Memorandum 
     \43\ that was itself dated July 27, 1995. It, with the ATS 
     memo (Document L, EM 00123-00135), went to the FDIC Board, 
     and it recommended the suit against Mr. Hurwitz be brought.
       The July 27 final version rolled into the ATS memo also 
     discusses the ``Pacific Lumber-Redwood Forest Matter'' 
     (Document L, page EM 00129). Therein, it notes the July 21, 
     1995, FDIC meeting with ``representatives of the Department 
     of the Interior [McReynolds], who informed us [the FDIC] that 
     they are negotiating with Hurwitz about the possibility of 
     swapping various properties, plus the possibility of the 
     FDIC/OTS claim, for the redwood forest.'' (Document L, page 
     EM00129). The memo also says that the ``Administration is 
     seriously interested in pursuing such a settlement.''
       Note what the memo does not say. It does not say Mr. 
     Hurwitz raised the issue of redwoods and linked them in any 
     way to the banking claims. It says that the Administration is 
     negotiating a swap of possible properties, plus the banking 
     claims. When the bank regulators learned of this (probably 
     from Mr. McReynolds on July 21, 1995), the bank regulators 
     should have been very uncomfortable. They had already 
     voluntarily injected themselves into a political dynamic with 
     other government agencies--one of which had apparently taken 
     their statutory obligation to recover cash by using claims 
     that belonged to the FDIC and were not even brought yet. At 
     this juncture Mr. Hurwitz had not raised the prospect of such 
     a scheme with the FDIC.
       The only other intervening event between the July 24, 1995, 
     memo drafts and the July 27, 1995, reversal is a meeting on 
     July 26, 1995, at 10:30 a.m. between the FDIC and OTS. Record 
     26 are the only set of meeting notes from that meeting,\44\ 
     and the notes reiterate the discussion between FDIC lawyers 
     and Mr. McReynolds on July 21, 1995. This puts the OTS 
     squarely inside the redwoods debt-for-nature scheme.
       The notes are very helpful to show the degree of 
     coordination between the FDIC and OTS about redwoods and the 
     linkage between the potential claims and redwoods. They also 
     show how the FDIC polluted the OTS decision-making with the 
     same political dynamic it had been part of for more than a 
     year. The FDIC staff summed up the situation and briefed OTS 
     about all of the important redwoods developments related to 
     Mr. Hurwitz:
       J. Smith--
       --Hurwitz won't sign tolling agreement with FDIC--need to 
     file lawsuit by 8/12
       --J Thomas-chances of success on stat. Limitations is 30% 
     or less
       --will continue discussions with Helfer
       --Pressure from California congressional delegation to 
     proceed
       Dept. of Interior--Alan McReynolds
       --Administration interested in resolving case & getting 
     Redwoods\45\
       --Pete Wilson has put together a multi-agency task group
       --Calif would put up $ 100 MM of California timberland
       --Hurwitz wants a military base between Dallas & Fort 
     worth-Suitable for commercial development
       --Hurwitz also wants our cases settled as part of the deal 
     \46\
       Two weeks ago-Hurwitz lawyer called Teri Gordon at home & 
     told him he should not be turned off by the $500 MM appraisal
       What is OTS'schedule? How comfortable is OTS w/ giving info 
     to Interior?
       (Record 26)
       None of the records reviewed contains any banking law 
     rationale for the reversal in the staff recommendation July 
     24, 1995, (which was to notify the board that they would 
     close out the potential claim against Mr. Hurwitz by letting 
     the statute of limitations run) and the July 27, 1995, 
     approach (which recommended a lawsuit against Mr. Hurwitz). 
     The only explanation for the reversal is the meeting with Mr. 
     McReynolds where the DOI and Administration's desire for 
     leverage was communicated and understood by the FDIC coupled 
     with the meeting with OTS where bank regulators from both 
     agencies discussed the Administration's desire for the 
     redwoods debt-for-nature scheme to succeed. At this juncture, 
     the thinking was that there would be no money for an 
     appropriation for the Headwaters, so a swap of some sort was 
     the only way to acquire the redwoods.
       The FDIC board only saw the July 27, 1995, memo. In their 
     meeting they discussed the redwoods scheme when they 
     discussed bringing the action against Mr. Hurwits (Record 
     27). As part of his briefing, Mr. John Thomas elaborates on 
     the redwood scheme to the FDIC board:
       Mr. Thomas. This is, of course, a very visible matter. It 
     is visible for something having no direct relationship to 
     this case, but having some indirect relationship. Mr. 
     Hurwitz, through Maxxam, purchased Pacific Lumber. Pacific 
     Lumber owns the largest stand of virgin redwoods in private 
     hands in the world, the Headwaters. That has been the subject 
     of considering--considerable environmental interest, 
     including the picketing downstairs of a year or so ago. It 
     has been the subject of Congressional inquiry and press 
     inquiry. So we assume that whatever we do will be visible.
       Interior, you should also be awar--aware, the Department of 
     Interior is trying to put together a deal to the headlines 
     [sic] [Headwaters] trade property and perhaps our claim. They 
     had spoken--they spoke to staff a few days ago about that and 
     staff of the FDIC has indicated that we would be interested 
     in working with them to see whether something is possible. We 
     believe that legislation would ultimately be required to 
     achieve that. But again, if it's the Board's pleasure, we 
     would at least try to find out what's happening and pursue 
     that matter and make sure that nothing goes on we're not 
     aware of--we're not part of. (Record 27, page 11-12)
     Later, Chairman Helfer raised the issue of whether bringing 
     suit enhances the prospect of settlement of non-banking 
     issues, that is the redwoods:
       Chairman Helfer. . . . does the FDIC's authorization to sue 
     enhance the prospect--the prospects for a settlement on a 
     variety of issues associated with the case?
       Mr. Thomas. It might have some marginal benefit, but I 
     don't think it would make a large difference. I think the 
     reality is that the FDIC and OTS staff have worked together, 
     expect to continue to work together, and so, I don't think it 
     would have a major impact. It might make some difference, but 
     I think particularly any effort to resolve this with . . . a 
     solution that involves the redwoods would be extremely 
     difficult.\47\ . . . (Record 27, page 16)
       These exchanges in the FDIC board meeting about the 
     redwoods are troubling simply because they occurred. They 
     injected factors that had nothing whatsoever to do with the 
     validity of banking claims against Mr. Hurwitz. The advice 
     and recommendations on July 27, 1995, deviated so widely from 
     the approach of staff that
       The deviation is likely a result of that meeting, coupled 
     with the OTS meeting on July 26, 1995, where they coordinated 
     on the claims they were paying the OTS to pursue and 
     conspired about the need for leverage to get the redwood 
     claims. The FDIC understood at that point that OTS's claims 
     may not be brought for months (or perhaps at all) and they 
     certainly knew that if ``we drop our suit, [it] will undercut 
     everything.'' (Record 21)
       The day following filing of the suit, FDIC lawyers sent a 
     memo to their communications department reiterating the 
     congressional and environmental interest due to the redwoods 
     issue. (Record 28) The memo explained conspiracy with the 
     Department of the Interior and how the department had been 
     negotiating for the redwoods using the FDIC and OTS claims. 
     The memo also indicated that it was the Administration that 
     was ``seriously interested in pursuing such a settlement.'' 
     (Record 28, page 2) In addition, as if the FDIC lawyers knew 
     they were doing something wrong, the memo emphasized that 
     ``All of our discussions with the DOI are strictly 
     confidential.'' (Record 28, page 2)
       Then the memo went on to suggest that the FDIC should not 
     disclose these discussions or deviate from the prior public 
     statement about redwoods. Basically that statement was that 
     if a redwood ``swap became an option, the FDIC would consider 
     it as one alternative and would conscientiously strive to 
     resolve any pertinent issues.'' (Record 28, page 2)
       The work on a redwoods swap by the FDIC and the Department 
     of Interior then grew as indicated by the volume of notes 
     from meetings where other federal entities were drawn into 
     the scheme. There was an August 2, 1995, DOI Headwaters 
     acquisition strategy paper drafted by Mr. McReynolds. It 
     reports the FDIC and the OTS ``are amenable to [a debt for 
     nature swap] if the Administration supports it.'' (Document 
     DOI B). This is blatant evidence of just how political the 
     FDIC's July 27, 1995, reversal was.
       There was the August 15, 1995, meeting between DOI, FDIC 
     (Smith), and OTS (Renaldi

[[Page E1133]]

     and Stems) (Document DOI C, page 2) where it was reported 
     that ``FDIC and OTS are wondering why DOI is not being more 
     aggressive with Hurwitz and is permitting [Governor] Wilson's 
     task force to take the lead'' (Document DOI C, page 2). This 
     is a stunning indictment of the political motivation of the 
     FDIC and OTS staff.
       There was coordination with Congressional offices (Document 
     DOI D).
       There was endorsement from the Assistant Secretary of DOI 
     of using the FDIC and yet to be filed OTS claims in exchange 
     for the redwoods (Document DOI E).
       There were multi-agency meetings that included the White 
     House ONM and CEQ (Document DOI F and H)
       The Vice President was lobbied by Jill Ratner for his 
     support of the redwoods scheme as was the White House 
     (Document DOI G), and bi-weekly conference calls were 
     occurring between the FDIC, the OTS, and the DOI to 
     coordinate on the redwoods scheme by September 1995.
       There was the October 1995, memo to the General Counsel of 
     FDIC about a scheduled meeting that was to occur on October 
     20, 1995 with Vice President Gore about the FDIC and OTS 
     claims and their integral linkage to leveraging redwoods. Mr. 
     Kroener, testified that the meeting never occurred, but the 
     information in the memo is nonetheless illuminating, and it 
     contradicts FDIC's statements that they were not after 
     redwood trees.
       The memo verifies that Mr. Hurwitz was not interested and 
     had not raised the notion of a redwoods swap for FDIC or OTS 
     claims. The memo says OTS met with Hurwitz's lawyer and ``no 
     interest in settlement has been expressed to OTS.'' (Record 
     33, page 2). The memo says that FDIC has had several meetings 
     and discussions with Hurwitz counsel prior to the filing of 
     the lawsuit. Hurwitz has never, however, indicated directly 
     to the FDIC a desire to negotiate a settlement of the FDIC 
     claims. (Record 33, page 2).
       This puts to rest the notion that Mr. Hurwitz was or had 
     been interested (or had raised) the notion of a redwoods swap 
     for the OTS or FDIC claim up to that point.\48\ Apparently, 
     the FDIC relied on erroneous representations of Mr. 
     McReynolds to the contrary.
       Then, in an incredible self-indictment, the FDIC observes 
     that it is ``inappropriate to include OTS'' in the meeting to 
     discuss possible settlement with Hurwitz because the OTS 
     claim was not approved for filing, and discussions may be 
     perceived as ``an effort by the executive branch to influence 
     OTS's independent evaluation of its investigation'' (Record 
     33, page 2). What exactly, then, did the FDIC think its 
     February 1994 meeting with Rep. Hamburg would do to its 
     independent judgment? What did the FDIC think repeated 
     contacts with environmental groups since 1993 would do? What 
     did the FDIC think that its meetings with Mr. McReynolds 
     right before their staff recommendation changed in July 1995 
     would do? Why did the FDIC and the OTS meet and have phone 
     briefings with DOI in July, August, September 1996. All of 
     these contacts were just as inappropriate then as they were 
     when FDIC staff wrote the briefing memo for Vice President 
     Gore's meeting. Did the FDIC lawyers take an ethics class 
     sometime between February 1994 and October 1995?
       In fact, the FDIC intended to help the Administration force 
     Mr. Hurwitz into trading his redwoods for the FDIC and OTS 
     claims. They wanted to induce a settlement, and their words 
     say it. There meeting with the Vice President was an 
     important meeting,
       FDIC has no direct claim against Pacific Lumber through 
     which it could successfully obtain or seize the trees or to 
     preserve the Headwaters Forest.
       FDIC's claims alone are not likely to be sufficient to 
     cause Hurwitz to offer the Headwaters Forest,\49\ because of 
     their size relative to a recent Forest Service Appraisal of 
     the value of the Headwaters Forest ($600 million); because of 
     very substantial litigation risks including statute of 
     limitations, Texax negligence--gross negligence business 
     judgment law, and Hurwitz role as a de facto director; and 
     the indirect connection noted above, including the risk of 
     Hurwitz facing suit from Pacific Lumber securities holders if 
     its assets were disposed of without Pacific Lumber being 
     compensated by either outsiders, or Hurwitz or entities he 
     controls. (Record 33, page 3) (emphasis supplied)

     Two things are clear after reading this passage. First, FDIC 
     staff intended the claim to operate as an inducement, along 
     with the OTS claim, for trees. Second, that there is no other 
     rationale, after reading this evaluation, for the FDIC 
     lawyers to have switched their recommendation between July 24 
     and July 27, 1995--except that they intended all along to 
     help the Administration by playing a part in inducing a 
     settlement.
       After reading this passage, one wonders why the FDIC still 
     attempts to propagate the obviously false notion that their 
     claims had nothing to do with redwoods.
       There was the October 22, 1995, meeting that included a 
     cast from DOI, OMEB, FDIC, DOJ, and the Department of 
     Treasury ``at which we [CEQ] initiated discussions on a 
     potential debt-for-nature swap.'' (Document DOI H). That 
     meeting led to FDIC attorney Jack Smith compiling a lengthy 
     memorandum to Kathleen McGinty, the Chairman of CEQ. The memo 
     reviewed issues and answers about the feasibility of various 
     legal mechanisms that might be used to facilitate the 
     redwoods debt-for-nature scheme. (Record 30).
       Then in late 1995, Judge Hughes, the U.S. District Court 
     judge who was assigned the FDIC's lawsuit discovered what the 
     FDIC and OTS had done to team up using
       At the same time (November 28, 1995) FDIC lawyers met with 
     Katie McGinty (CEQ), Elizabeth Blaug (CEQ), and John 
     Girimundi (DOI) where it was decided that there would be ``no 
     formal contacts until OTS file,'' (Record 38) and it was 
     acknowledged that ``after the administrative suit is filed is 
     time for opening any discussions.'' However, the FDIC had 
     already had several discussions with OTS about the redwoods 
     swap, as had DOI staff beginning in July 1995, even before 
     the FDIC claim was filed.
       The notes from meetings between the FDIC and/or the OTS and 
     environmental groups, government agencies, federal 
     departments, the White House, from September 1995 through 
     March 1996. (Record 31)

1996. FDIC Lawyers Cannot Find Their Way Out of the Forest--help, ``we 
               need an exit strategy from the Redwoods''

       By January 6, 1996, the redwoods scheme had come together 
     as planned. John Thomas reported to Jack Smith in a weekly 
     update:
       United Savings. OTS has filed their notice of charges. The 
     statute has been allowed to run by us [FDIC and OTS] on 
     everyone other than Hurwitz. We have moved to stay our case 
     in Houston, and are awaiting a ruling.
     . . . And there is question of whether a broad deal can be 
     made with Pacific Lumber. (Record 36)
       Shortly thereafter, on January 19, 1996, the fact that Mr. 
     Hurwitz had not directly brought the issue of the redwoods 
     into settlement discussions became a problem. OTS apparently 
     refused to join the meetings led by CEQ about Headwaters, and 
     an FDIC lawyer reported the refusal to CEQ:
       I advised Elizabeth Blaug about this yesterday afternoon. I 
     said that if Hurwitz wanted to have global settlements with 
     OTS and FDIC involved, he would have to ask for them. (Record 
     36A)
     In other words, the ex parte agency discussions (without Mr. 
     Hurwitz) about FDIC and OTS banking claims were at least 
     improper, and the impropriety was now realized; however, it 
     was too late.
       By March 1996, the FDIC and OTS were deeply involved with 
     promoting the redwoods debt-for-nature scheme, but they had 
     still yet to receive any direct communication from Mr. 
     Hurwitz proposing a redwoods swap for their claims. About 
     March 3, 1996, the FDIC attorneys must have begun to realize 
     that the agency should not be involved in the redwoods 
     scheme. He made the following note on what appears to be a 
     ``to do'' list:
       Tell Mc[Reynolds]--we need exit strategy from Redwoods. NO 
     collusion.
       (Record 32)
     So, the FDIC was (and still is) saying to the world that 
     their claims have nothing to do with leveraging redwoods, and 
     seven months after they are brought they ``need and exit 
     strategy''? After two years of collusion between FDIC and a 
     half dozen federal agencies, several environmental groups, 
     the White House, and the OTS about a redwood scheme the FDIC 
     wants to talk to McReynolds to ensure that there is ``NO 
     collusion''?
       And, by August 8, 1996, Mr. Hurwitz still had not 
     apparently raised the redwoods debt-for-nature issue in the 
     context of settling banking claims. Record 40 at page 2 are 
     questions (and the start of draft answers) from Elizabeth 
     Blaug to Jack Smith. Question number one is, ``Why doesn't 
     the Administration forget the land exchanges and get Hurwitz 
     to settle his debts in exchange for the trees?'' The answer: 
     ``would be inappropriate because of independent status of 
     regulators, pending litigation and administrative proceeding. 
     . . .''
       This means what FDIC and OTS had done since February 1994 
     concerning advancing the redwoods debt-for-nature scheme was 
     inappropriate. In addition, if Mr. Hurwitz had really raised 
     the notion of a redwood for bank claims swap, then this 
     question would have been entirely unnecessary. The answer 
     would have been ``Mr. Hurwitz raised it, the bank regulators 
     and Administration did not, and we are pursuing that 
     option.'' But that was not the case. The fixation on 
     ensuring--even as late as August 1996--that Mr. Hurwitz would 
     ``flrst'' raise the redwoods issue to the FDIC and OTS is 
     quite illustrative of the fact that he had yet to do it and 
     it was a prerequisite to either banking agency engaging on 
     the redwoods scheme--something that they had already done.
       Finally, on September 6, 1996, nearly a year after the FDIC 
     suit was filed, the FDIC and OTS got what they wanted--a 
     direct contact from Hurwitz that ``he will propose that the 
     FDIC take certain redwood trees which we will exchange for 
     other marketable property from perhaps Interior.'' (Record 
     41) The settlement meeting came the following week, and it is 
     the first time Mr. Hurwitz's representatives raised the 
     possibility of settling the banking claims using redwood 
     trees. (Record 41) The settlement proposal was reject by the 
     Department of the Interior within a few days, and it was 
     clear that the FDIC and OTS were not even in charge of 
     settling their own claims. (Record 42) This is additional 
     evidence of the political nature of the FDIC lawsuit and OTS 
     administrative action.

[[Page E1134]]

       Discussions about a redwood swap for banking claims ebbed 
     and flowed through the remainder of 1996, 1997, and 1998, and 
     the law that authorized the outright purchase of the 
     Headwaters Forest was enacted on November 14, 1997. Then, 
     pursuant to that law, the transaction closed on the last day 
     before the authorization and funds expired, March 1, 1999, 
     and the federal government, with the help of the State of 
     California purchased the Headwaters Forest.
       This action left the bank regulators without their ``exit 
     strategy'' (Record 32) from the redwoods scheme, and with a 
     U.S. District Court judge that somehow began to see the FDIC 
     and OTS cases and coordination for exactly what they were: 
     strong arm tactics of an ``independent'' agency out of 
     control. In an uncommonly harsh opinion, U.S. District Court 
     Judge Lynn N. Hughes described FDIC tactics of bringing this 
     case as those of the cosa nostra (meaning a tactic of making 
     an ``offer'' that Hurwitz could not refuse). The July 27, 
     1995, FDIC ATS memorandum somehow ended up on the web page of 
     the Houston Chronicle, and the court allowed discovery on the 
     improper FDIC and OTS coordination and cooperation in the 
     scheme to leverage the redwoods from Mr. Hurwitz.
     Conclusion
       The OTS case proceeded in the administrative forum, but a 
     decision has still not been rendered. In spite of a late 
     desire by the OTS to keep their claims clean of the redwoods 
     matter, FDIC polluted its and OTS'claim by prompting and 
     paying for OTS to pursue them in the first place as part of 
     the redwoods scheme. OTS also attended several meetings in 
     which details of the redwood swap scheme were discussed well 
     before their claims were noticed or filed, including the 
     critical July 26, 1995, meeting with the FDIC at which DOI 
     and the Administration's desires for the redwoods and need 
     for the banking claims to leverage the redwoods from Mr. 
     Hurwitz were spelled out. The OTS is equally responsible for 
     improper involvement in the redwoods scheme, and the 
     pollution of its claims with a political agenda.
       Meanwhile, Mr. Hurwitz has reportedly spent some $40 
     million to defend himself from a tactics that equate to those 
     of the cosa nostra. Indeed, it is the bank regulators at the 
     FDIC and OTS who shoulder responsibility for advancing a 
     corrupted claim for improper purposes (i.e., to leverage 
     redwoods) that are not authorized by law.
       If anyone bears responsibility for corrupting the bank 
     regulatory system--it is the FDIC and OTS legal staff who 
     caved to the redwood desires of the DOI and the 
     Administration. The Directors of the FDIC and OTS should take 
     corrective action and withdraw the authorization for the FDIC 
     lawsuit and the OTS administrative action against Mr. Hurwitz 
     for matters involving USAT. Integrity of the bank regulatory 
     system demands nothing less.


                                 NOTES

       \1\ Therefore, funds appropriated to of any federal entity 
     cannot be used for any activity that even supports 
     acquisition of more Headwaters Forest. If funds are spent for 
     such activities, then they are not legally spent.
       \2\ The FDIC action was authorized on August 1, 1995, and 
     filed on August 2, 1995, the final day under the statute of 
     limitations; Notice of the OTS administrative action was 
     filed on December 26, 1995 and the OTS trial began on 
     September 22, 1997.
       \3\ This occurred when the concept of purchasing the 
     redwoods outright from Mr. Hurwitz was unlikely due to budget 
     constraints.
       \4\ The first indication that bank regulators became part 
     of the redwoods debt-for-nature scheme was rendered by U.S. 
     District Court Judge Lynn Hughes, who observed that the FDIC 
     and OTS were targeting Mr. Hurwitz in a manner that resembled 
     tactics of the cosa nostra.
       \5\ The latest example of debt-for-more-nature is contained 
     in Record 1A.
       \6\ This violated the ``no more'' clause, because federal 
     funds were being spent to acquire additional acreage of the 
     Headwaters Forest. The continued pursuit of redwood trees 
     through debt-for-nature by bank regulators in no way 
     diminishes the highly inappropriate involvement of the bank 
     regulators in participating in the debt-for-nature scheme 
     before the statute was enacted or before the transaction was 
     consummated.
       \7\ 12 U.S.C. 1462a et.seq.
       \8\ 12 U.S.C. 1818 et. seq.
       \9\ Some non-banking claims (e.g. possible securities law 
     claims) were referred to other entities for investigation.
       \10\ This cooperation was formalized in May 1994 when the 
     FDIC began paying the OTS to advance its claims.
       \11\ These contacts were: Rep. Gonzolez to Hove (FDIC), 
     November 19, 1993; Rep. Dellums to Hove (FDIC), December 15, 
     1993; and in 1994, at least seven written Congressional 
     contacts were made to the FDIC or OTS on the debt-for-nature 
     matter. Interestingly, Rep. Dellums wrote to the FDIC about 
     the redwoods swap on the following dates: December 15, 1993, 
     February 9, 1994, May 27, 1994, and September 14, 1995; and 
     it was reported that on Monday, July 18, 1994, Ms. Jill 
     Ratner attended a fundraiser for Re. Dellums in Oakland, 
     California where she discussed the redwoods issue with the 
     Vice President Gore. ``Mr. Gore said, `I'm with ya,' '' 
     Ratner reported enthusiastically to members of the Bay Area 
     Coalition for the Headwaters Forest after the early-morning 
     fundraiser for Rep. Ron Dellums, D-Oakland, in Oakland'' San 
     Francisco Daily Journal, Friday, July 22, 1994. (Document J)
       \12\ In addition on November 30, 1993, Jack D. Smith, sent 
     a memo about ``Hurwitz'' to Pat Bak (another FDIC lawyer) 
     about two issues--(1) the Hamburg Headwaters acquisition bill 
     and (2) some materials about a type of claim called a ``net 
     worth maintenance'' claim advising Bak not to ``let the claim 
     fall through the crack!'' The December 21 memo to Hove from 
     Smith notes that FDIC and OTS are coordinating on this claim 
     because the courts will ``not enforce'' them and there will 
     be FDIC/OTS discussions about OTS bringing the net worth 
     maintenance claims.
       \13\ The FDIC maintains that Mr. Hurwitz raised the issue 
     of redwoods directly with the FDIC in September, August or 
     September, 1996 (after the FDIC lawsuit was filed) and 
     indirectly July 1995, through the Department of the Interior 
     (prior to the lawsuit being authorized and filed by the 
     FDIC). There is serious question whether a bank claims for 
     redwoods swap was raised by Mr. Hurwitz or his lawyers prior 
     to September 6, 1996, a year after the FDIC case was filed. 
     (See discussion infra.)
       \14\ Such a forum--an administrative law judge at OTS--as 
     opposed to an Article III court would be viewed by bank 
     regulators as more favorable.
       \15\ FDIC admitted in a later memo that its claim against 
     Hurwitz was not enough to leverage his redwoods because it 
     was for a lower dollar amount than necessary and it was so 
     weak on the merits, which is why the OTS administrative 
     action on the same facts became so important to the scheme. 
     (See, discussion infra at page 41 et. seq. and Record 33.) 
     This is truly an incredible admission of the redwood purpose 
     on the part of FDIC and is an admission of why the FDIC hired 
     the OTS. Clearly it was to pursue a redwoods debt-for-nature 
     scheme.
       \16\ Bank regulators at the FDIC attempted to do this by 
     saying that they never raised the redwood issue with Mr. 
     Hurwitz. To have done so would be an admission that they 
     intended a redwoods debt-for-nature scheme, but their defense 
     (that Mr. Hurwitz raised it with them first) really not 
     address reach the issue of whether redwoods or a scheme to 
     get redwoods from Mr. Hurwitz had any relationship to their 
     banking claims.
       \17\ Id. See also, hearing transcript at pages 97-100 for 
     the exchange between Mr. Kroener and the Members of the task 
     force when he was confronted with internal FDIC e mail 
     messages indicating that their lawyers were pursuing 
     discovery for purposes of ``harassing'' Mr. Hurwitz.
       \18\ Rep. Hamburg had introduced H.R. 2866 that authorized 
     the Forest Service to purchase the Headwaters Forest and 
     designate it as wilderness.
       \19\ This meeting was preceded on February 2, 1994 with 
     what appears to be a prepatory phone call between staff of 
     Rep. Hamburg and a counsel to Chairman Gonzolez, Amanda 
     Falcon.
       \20\ A net worth maintenance claim automatically attaches 
     to owners who have 25% or more of a failed bank. Under 
     banking law an owner is required to contribute personal funds 
     to keep the bank solvent in such a case. Where ownership is 
     less than 25%, bank regulators often try to get owners to 
     sign an agreement binding them to personal contributions to 
     keep failing institutions solvent. This is called a net worth 
     maintenance agreement. There was no net worth maintenance 
     agreement between Mr. Hurwitz and the bank regulators.
       \21\ Later Mr. Isaac explained the impropriety of outside 
     meetings revealed in the ATS memo. The meeting with Rep. 
     Hamburg was unknown at the time, but it is a dramatic example 
     of how much the bank regulators polluted their process with a 
     redwood agenda. Mr. Issac words: ``[O]ne of the things that 
     that Agency has always prided itself on is its independence 
     and its integrity and its freedom from the political process. 
     To meet with environmentalists or anybody else, 
     administration officials or congressional representatives, to 
     talk about litigation that is proposed or is ongoing is 
     something that I think was and is highly inappropriate. I 
     find it shocking that people--people did that, and I've never 
     seen that happen at that Agency before and I'm quite 
     surprised by it.'' (Hearing Transcript, page 45).
       \22\ This is a very odd characterization, given that 
     government agencies to not generally have authority to 
     represent individuals or other entities. If Ms. Tanoue was 
     saying that Mr. Hurwitz somehow raised the redwoods issue to 
     the FDIC through the Department of the Interior, the 
     characterization is not legitimate for several reasons. 
     First, there is no evidence that the DOI is authorized by law 
     to hold such a representative capacity. Second, the 
     characterization is at odds with the fact that the DOI 
     lawyers had been briefed and lobbied by environmental groups 
     years prior to the DOI raising the issue (if indeed they 
     did). Third, the characterization is at odds with the 
     strategy sessions with Rep. Hamburg that are now known to 
     have taken place. Fourth, the characterization presumes that 
     the DOI ``representatives'' were accurately and truthfully 
     making such an ``offer.'' Absent written proof of such an 
     offer, this characterization is not believable. To the 
     contrary, the written evidence clearly shows that Mr. 
     Hurwitz's representatives were discussing trades of surplus 
     government land for the redwoods at the time.
       \23\ Mr. Kroener is playing with the facts. See footnote   
     .
       \24\ (Footnote not part of original) This statement is 
     incorrect, given the notes of the

[[Page E1135]]

     Rep. Hamburg meeting that show that the FDIC lawyers had 
     willingly promoted their claims as leverage in the redwoods 
     debt-for-nature scheme.
       \25\ They had no claim because they ``could not find'' a 
     net worth maintenance agreement with Mr. Hurwitz.
       \26\ When the FDIC finally filed its claim in federal court 
     on August 2, 1995, the federal judge hearing the case, Judge 
     Hughes, said the FDIC and OTS used tools of Cosa Nostra (the 
     mafia) against Mr. Hurwitz, uncommonly strong language to 
     describe actions by any party, let alone the federal 
     government.
       \27\ Leverage by other agencies--the Department of Labor 
     and the Securities and Exchange Commission was also discussed 
     at the Hamburg meeting. (See meeting note (bates number JS 
     004216) attached after Record 2A, page 2.) These are Jeff 
     Smith's records.
       \28\ In light of the existence of this analysis by F. 
     Thomas Hecht, one wonders how FDIC can, with any seriousness, 
     keep saying that their claims and litigation had nothing to 
     do with redwoods or a redwood debt-for-nature scheme. Their 
     outside lawyers were analyzing the very debt-for-nature 
     theories lobbied by the environmental groups and they acted 
     as an early conduit to funnel information to FDIC legal 
     staff. Even if one does agree with the positions of the Rose 
     Foundation or Earth First! on this issue (and this report 
     does not address their advocacy or their right under our 
     Constitutional government to free speech and to petition 
     their government), one must question the response of the FDIC 
     and its outside lawyers to that petitioning. If the FDIC is 
     truly operating under its statutory mandate--which is to 
     recover cash--then the proper response to environmentalists 
     or anyone else should have been, ``We have a statutory 
     mission, and it is not to help the federal government acquire 
     redwood trees or anything else, period.'' Surely, the 
     redwoods agenda should not have permeated the bank 
     regulators' analysis and thinking as it did.
       \29\ The handwritten memo is not dated, but it refers 
     waiting until the fourth quarter of 1994 to make a decision, 
     so this places the memo in late in the second or third 
     quarter of 1994.
       \30\ McReynolds, according to his calendar entry, also met 
     on May 16, 1995, with Geoff Webb (DOI) and Julia Levin, with 
     the Natural Heritage Institute. That group had just written a 
     paper for the Rose Foundation on April 19, 1995, entitled 
     ``Federal Inter-Agency Land Transfer Mechanisms.'' (Record 
     11A) That paper notes that there are ``six federal statutory 
     programs that allow property under control of one Federal 
     agency to be transferred to another Federal agency or into 
     non-federal lands'' and it begins laying out the mechanisms 
     to get Mr. Hurwitz's redwoods into federal ownership.
       \31\ This date is important. Mr. Kroener's testimony and 
     representations to the Task Force that it was July _ 1995, 
     when DOI raised redwood debt-for-nature on behalf of Mr. 
     Hurwitz. The first-hand involvement between Mr. McReynolds 
     and Ms. Ratner (and the flyover) occurred two months prior to 
     the time when DOI is said to have raised the redwoods debt-
     for-nature swap on behalf of Mr. Hurwitz with the FDIC and 
     OTS.
       \32\ This wholesale acceptance of the environmentalist 
     rhetoric about virgin redwoods in itself shows bias. The 
     author of the memo must be misinformed, because the United 
     States and the State of California already owns tens of 
     thousands of acres of virgin redwood stands in California, 
     most of which are parks that will not be logged.
       \33\ Two of the many examples are (1) the September 26, 
     1994, 43 page legal analysis how the FDIC could impose a 
     constructive trust over Hurwitz's Pacific Lumber redwoods 
     (Record 13) and (2) the June 29, 1995, letter from F. Thomas 
     Hecht to the FDIC's attorney Jeffrey Ross Williams that 
     forwarded a legal memo about the Headwaters situation and qui 
     tam claims that had been filed related to the forest. (Record 
     14)
       \34\ The notes do not say that Mr. Hurwitz or any of his 
     authorized representatives asked DOI to broach a redwoods 
     debt-for-nature deal to swap bank claims for redwoods. The 
     FDIC informed Chairman Young that the chain of events leading 
     to McReynolds call was an 8:00 p.m. July 13, 1995, call to 
     Alan McReynolds ``at his home'' from John Martin, a Hurwitz 
     lawyer, ``urging him to contact the FDIC to begin a dialogue 
     to resolve the FDIC's claims as part of a larger land 
     transaction involving the Headwaters Forest that was being 
     considered by Mr. Hurwitz and the Department of the 
     Interior.'' (See, October 6, 2000, letter to Duane Gibson, 
     General Counsel, Committee on Resources, from William F. 
     Kroener, III, General Counsel FDIC contained in Appendix 3) 
     This representation in no way says that Mr. Hurwitz (or his 
     lawyer) initiated the discussion of a redwoods debt-for-
     nature swap with the Department of the Interior. It artfully 
     says Mr. Hurwitz was ``considering'' such a proposal--a 
     proposal more likely initiated by Mr. McReynolds.
       In any case, the FDIC's legal relationship on any USAT 
     banking matter was with Mr. Hurwitz, not with the Department 
     of the Interior. Any indirect suggestion by an intermediary, 
     such as Mr. McReynolds, who did not represent Mr. Hurwitz or 
     USAT, does not change that legal relationship or alter the 
     FDIC's responsibility to keep its claims free of political 
     influence--from in and outside of the government. However, 
     there is considerable question whether McReynolds' 
     recollections related to a call from John Martin are 
     accurate. Mr. Martin was discussing (with McReynolds) 
     potential swaps of excess government property, such as 
     military bases, for the redwoods, a subject with which 
     McReynolds had experience. Mr. Martin's notes from his 
     discussions at the time back up his recollection (Record 25).
       \35\ It is important to note that notes of McReynolds 
     conversation with DeHenzel do not in any way indicate that 
     Mr. Hurwitz or his lawyers had suggested or urged linking a 
     settlement of the USAT banking claims and Mr. Hurwitz's 
     redwoods in a swap, which is what McReynolds later said in 
     sworn testimony.
       \36\ The Endangered Species Act was preventing Mr. Hurwitz 
     from harvesting redwoods on Pacific Lumber Company's 
     Headwaters land.
       \37\ (This footnote is not in original). This refers to 
     surplus federal properties that were being considered by the 
     government and Mr. Hurwitz on such a swap involving the 
     redwoods. Mr. McReynolds had been working with Hurwitz 
     lawyer, John Martin on potential swaps involving surplus 
     military government property and redwoods.
       \38\ (This footnote is not in original). The $400,000 
     refers to the approximate amount FDIC had paid the OTS to 
     bring its administrative action up to that point.
       \39\ (This footnote is not in original). This could refer 
     to the fact that FDIC had not decided whether to bring its 
     case, and the staff would recommend at that time that the 
     Board not authorize the suit. Document X verifies that this 
     was the staff recommendation at that time. This could also 
     refer to the fact that OTS has not decided to bring their 
     case.
       \40\ (This footnote is not in original). Indeed, this is 
     the issue (a swap of redwoods for a surplus military base) 
     that Mr. McReynolds and Hurwitz lawyer, John Martin, had 
     discussed.
       \41\ (This footnote is not in original). The prior four 
     sentences (notes from what McReynolds said) are very 
     important, however, especially when read in context of 
     footnote 25 and 26 of this report. Those sentences are: 
     ``Adm[inistration might trade mil[itary] base. Had call from 
     atty. Appraisals on prop[erty] for $500m. Said they want to 
     make a deal.'' Indeed, Mr. Hurwitz wanted to make a deal--
     swapping redwoods for military bases. That was the subject of 
     the ongoing discussion between the attorney who called 
     McReynolds, Mr. John Martin of Patton Boggs, and McReynolds. 
     Mr. Martin was only discussing possible trades of military 
     bases for redwood land owned by Pacific Lumber. (Record 25) 
     Mr. Martin did not deal with issues related to the banking 
     claims and his notes from conversations with McReynolds 
     verify this. The idea of mixing the bank claims--having been 
     floated for years in Congress, in environmental circles 
     including the Rose Foundation, was likely first raised by 
     someone else, and it was McReynolds who had spent time 
     ``flying over Headwaters'' with Rose Foundation Director, 
     Jill Ratner, in May 1995.
       \42\ (footnote not in original) This confirms the earlier 
     stated conclusion that one of the things that changed on July 
     21, 1995 was the realization by FDIC lawyers that the Clinton 
     Administration and DOI had adopted and embraced the redwoods 
     debt-for-nature scheme and they wanted it to be successful.
       \43\ FDIC decisions to file lawsuits are made by the FDIC 
     Board, and the Authority to Sue Memorandum (ATS Memorandum) 
     is the vehicle through which the FDIC staff lays out the case 
     to the board.
       \44\ These notes appear to be taken by Bryan Veis of the 
     OTS enforcement branch, and they are the only notes of this 
     meeting produced, despite the fact that there were twelve 
     attendees at the meeting--five from the OTS and seven 
     representing the FDIC. (See, Record 26, page 00933). In the 
     view of Committee staff, there appear to be serious omissions 
     from the production of both agencies related to this meeting.
       \45\ (footnote not in original) So, it was indeed the 
     Administration that wanted the redwoods, and brought them 
     into the discussions.
       \46\ (footnote not in original) Note that the FDIC has had 
     no direct contact from Mr. Hurwitz about such a proposal to 
     settle the case using redwoods and they did not until 
     September 1996. The FDIC is simply taking the word of the DOI 
     on the issue.
       \47\ It is extraordinarily difficult to square this 
     evaluation by Mr. Thomas with the discussion in the July 21, 
     1995, meeting that he attended where it was noted that, ``If 
     we drop suit, will undercut everything.'' (Record 21)
       \48\ Record 35, page 2 and 3 also confirms this fact.

[[Page E1136]]

       \49\ Record 34 also confirms the thinking of FDIC lawyers 
     that ``it will take more than FDIC claims to get the trees 
     and FDIC remains an important part of exploring creative 
     solutions to the issue.'' This sounds like words from staff 
     of an agency trying to find a purpose, rather than staff of 
     an agency carrying out its statutory purpose. In fact, Record 
     39, a ``Draft Outline of Hurwitz/Redwoods Briefing'' from Mr. 
     Jack Smith's files, actually states directly how FDIC had 
     strayed from its mission and adopted as its agenda the 
     redwoods debt-for nature scheme: Significant development 
     involving multi-Agency initiative led by Office of the Vice 
     President to obtain title to last privately owned old growth 
     virgin redwoods and place under protection of Department of 
     Interior's National Park Service. FDIC plays prominent role 
     in this Government initiative.'' The outline also 
     acknowledges that the FDIC, working with CEQ, Interior, other 
     agencies in exploring viability of ``debt for nature 
     settlement.'' (Record 39, page 2) The date on this outline is 
     May 16, 1996.