Federal Deposit Insurance v. Hurwitz (384 F. Supp. 2d 1039, 2005)

Opinion on Sanctions

HUGHES, District Judge.

1. Introduction.

This is a cautionary tale where the emperor has new clothes — a bandit’s mask. The Federal Deposit Insurance Corporation sought to hold Charles Hurwitz individually responsible for all losses at United Savings, even though he had no obligation to the thrift or the government. Unable to focus its claims and unwilling to disclose its records in this suit — one that it brought — the FDIC surreptitiously paid another agency to bring a parallel administrative claim against Hurwitz, several companies, and other people. Later — much later — the FDIC dismissed its claims here. Hurwitz and two companies have asked that they recover their costs of defending the suit. They will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation.

2. Background.

This is the final stage in a suit that should have never happened. Ten years ago, the Federal Deposit Insurance Corporation sued Charles Hurwitz, a Texas businessman. In essence, it blamed him for the failure of a Texas thrift — United Savings Association of Texas. The case occurred on two fronts. The FDIC sued Hurwitz in this court. The Office of Thrift Supervision brought an administrative action. Together, the agencies claimed over one billion dollars from Hurwitz. Recovery in either action would go to the FDIC because the FDIC had procured the Thrift Office’s proceeding against Hurwitz, paying it to bring that action.

A.Companies.

The FDIC sued Hurwitz because of his involvement in two companies that owned stock in the thrift’s holding company. They owned no stock in the thrift. In the 1980s, Hurwitz was chairman and chief executive officer of Maxxam, Inc., a publicly held corporation with subsidiaries in aluminum, timber, and land. He was also chairman and chief executive officer of Federated Development Company, a New York business trust with a portfolio of real estate and mortgages. Until February 1988 — ten months before the United Savings failed — Hurwitz had been chairman of United Financial Group, its holding company.

Hurwitz owned about 52% of Federated, and Federated owned 63% of Maxxam. In 1988, Federated and Maxxam jointly owned less than one-quarter of United Financial. United Financial owned 100% of United Savings of Texas. United Savings was a thrift; that is a bank that operated under a set of regulations slightly distinct from ordinary commercial banks. Thrifts are the current incarnation of the savings part of the old federal system of full-service banks and savings-and-loans. Along with credit unions — banks and thrifts are depository institutions. What each is permitted by the several regulatory agencies varies slightly.

B. Climate.

Despite the expensive and pervasive regulation by governmental agencies, in the decade 1986-1995, approximately 1,043 thrifts failed, leading to the insolvency of the agency that insured their deposits and supervised them — Federal Savings and Loan Insurance Corporation. FSLIC’s responsibilities were eventually passed to the FDIC, which is how it became interested in United Savings and Hurwitz. During 1980-1994, the FDIC itself lost 1,617 banks under its responsibility. In 1997 dollars, the direct cost of the thrifts to the public treasury was about $200 billion.

The FDIC may manage failures by simply honoring its insurance commitment and paying the depositors to the policy limits. It can also arrange for another bank or investor to buy the failed bank and assume its obligation to the depositors. Its third technique is to run the insolvent bank itself, supplying capital and management, until it can be sold or returned to independence. This is called a bridge bank. The FDIC prefers to sell with an assumption because it relieves it of having to collect the assets of the bank — the funds due it on loans mostly — and of having to pay the full depositor claims directly. Of 169 banks that failed in 1990, 20 were insurance payments, one was a bridge bank, and 148 were sales to other banks.

C. United Savings.

A thrift, Houston First American Savings Association, was insolvent in 1983, when it was owned by people wholly unrelated to Hurwitz and Maxxam. The FDIC allowed United Financial to take First American off its hands. After extensive negotiations, United Financial bought First American and merged it into its thrift, United Savings of Texas. The FDIC sought a personal guaranty from Hurwitz as part of the deal, but he declined. It asked for guaranties from Maxxam and Federated, but they declined. The final arrangement was simply that United Financial acquired the failed thrift and reconstituted it with its thrift as United Savings of Texas. United Financial committed the capital that it had agreed to invest.

Unfortunately, United Savings did not succeed. In 1989, the FDIC declared it insolvent. United Financial’s investment was eroded completely. The FDIC met its insurance obligation by selling United Savings to Ranieri/Hyperion — a joint venture.

The cause of United’s failure was indistinct from what caused most of the other insolvencies. The original plan for thrifts was that (a) they could pay slightly higher rates on savings accounts than banks, (b) their lending was essentially limited to home mortgages, and (c) deposit insurance was at a low level, reflecting the safety-net role it played. Prolonged, government-induced inflation eroded the assets of the whole system. The government’s response was to release the interest rate restrictions, expand the lending authority to nearly everything, and raise the insurance coverage from $20,000 to $100,000. This allowed the industry as a whole to attempt to earn its way out of its general insolvency — an insolvency that was not publicly acknowledged.

The collapse of oil and real-estate prices in the middle 1980s made many of the high-rate, business loans unrecoverable. Other forces affected thrifts, like the rise of money market funds and corporate— non-deposit based — lending. Although actively dishonest people were in charge of some thrifts that failed, the bureaucratic response to the mess was generally to accuse officers and directors of malfeasance when misfeasance was the worst that the facts would support.

D. FDIC.

Soon after the collapse of United Savings in 1988, the FDIC approached Hur-witz about his contributing to paying its losses. Hurwitz agreed to extensions of the time limit for the FDIC to sue him. Having found no focus of their claims against him by 1995, Hurwitz declined to extend the deadline again, but the actual directors and officers of the thrift continued to sign tolling agreements. The FDIC sued Hurwitz right before the last extension expired.

After an adverse ruling or two from this court, the FDIC illegally paid the Office of Thrift Supervision to bring an administrative action. The Thrift Office sued Hur-witz, Barry Munitz, Jenard Gross, Arthur Berner, Ronald Huebsch, Michael Crow, Federated, and Maxxam. Munitz, Gross, Berner, Huebsch, and Crow were former directors and officers of United Financial and United Savings. While the claims by the Thrift Office had a technical regulatory basis, they were the same as the FDIC’s contention that somehow the accused were responsible for the thrift’s failure — responsible legally.

E. Hurwitz Responds.

The FDIC abandoned its claims here in November 2002. Hurwitz, however, had counterclaimed in this court that the suit was a ruse — political extortion. Its true purpose, he said, had nothing to do with the management of thrifts and everything to do with the politics of trees.

In the late 1980s, Maxxam had acquired Pacific Lumber, a timber company. Pacific Lumber owned 44,000 acres of redwoods in Northern California, including the Headwaters Forest, a 4,400-acre tract of ancient redwoods.

Environmentalist activists accused Hur-witz of plans to raze the forest. They lobbied the Clinton Administration, California officials, and members of Congress, urging the government to gain control of the forest. The Forest Service studied the redwoods, but it decided that acquiring them would require an appropriation that was not politically practical.

In the early 1990s, one environmental group proposed that the government make claims against Maxxam-related companies and people and then trade those claims for the trees — the “debt-for-nature” swap. The group insisted that the FDIC sue Hurwitz for so much money — creating the “debt” — that he would be compelled to settle by surrendering the redwoods — the “nature.”

Hurwitz says that the FDIC joined the effort to appease the green lobby, congressional pressure, and Administration political preferences. Despite a learned opinion from its private counsel that it had ■ no viable claim against Hurwitz and the others, the FDIC sued here and later illegally hired the Office of Thrift Supervision to bring identical, baseless claims.

F. FDIC Posture & Harsh Reality.

The FDIC swears that it gave no “serious consideration” to the exhortations of green groups or legislators; that it spent no time evaluating the written or oral proposals of outsiders; that it never discussed a debt-for-nature swap; and that no employee of the agency ever analyzed a proposed swap. The FDIC maintains that it had a solid case; that it exercised only its independent regulatory judgment; that it did not participate in extra-agency proposals or deals; and that it was promptly and thoroughly candid in this and the regulatory action.

The facts are otherwise. An extensive record — produced at substantial expense and by repeated court compulsion — reveals a regulatory scheme that slipped into self-absorbed, extra-legal, politically motivated trampling of citizens and the law.

The record includes (a) memoranda sent to as well as received from environmental groups; (b) notes of telephone calls between the FDIC and these groups; (c) minutes of conferences among FDIC staff, its counsel, and greens; (d) e-mails discussing a debt-for-nature swap, including adjustments to the dollar amount of the United Savings’s claims to reflect the value of the timber; (e) letters from Congress; (f) minutes of regular meetings of green groups, congressional staff, and other executive-branch staff; (g) recalcitrance in disclosure; (h) its squelching its inspector-general investigation; and (i) behavior at depositions that ranged from manipulative evasiveness to plain perjury.

The record reveals that the FDIC attacked Hurwitz in a perverse combination of personal and political hostility. The personal part was political, too, since it was derived from the bureaucrats’ and their like-thinking co-conspirators’ appreciation of a successful entrepreneur as the personification of what they opposed in America. As individuals they are free to think and act as they wish, but as agents of the government they are constrained by their particular bureau’s statutory mandate and the Constitution’s restriction on personal, partial, and irregular government.

When the government invokes the authority of the judiciary, it is obliged to follow the rules. This is called equal justice under law.

The FDIC’s documents contradict its protestations of independence, the merit of its suit, and the legality of the arrangement with OTS. The FDIC was refractory about disclosing its internal documents because they demonstrate, beyond question, that it became a tool in a political guerrilla war at the behest of interest groups and the administration. These outsiders, in fact, shaped this case, including the damage “calculation.” The FDIC knew that it had no authority to pay the OTS for the other action. Despite these realities, the FDIC persisted in its expensive, abusive litigation for a decade.

The public, through this court, has devoted substantial resources to this case. On sanctions alone, the court held a two-day hearing and has scrutinized the pleadings and exhibits totaling approximately 10,000 pages. It has also reviewed the rest of the record. The court concludes that the FDIC has lied to Charles Hur-witz, the public, and this court. Over the past ten years, the suit — here and in Washington — has cost the taxpayers in whose name these people acted tens of millions of dollars. Naturally, the agencies cost the defendants millions, too. Hurwitz is not content with the torture stopping. He has sought compensation.

3. Chronology: 1980-84..

United Savings Association of Texas was a thrift: it held savings accounts and lent or otherwise invested them. It acquired deposits by agreeing to pay interest and to repay the principal in the short term. Like other institutions that borrow on a short term and lend on a longer term, United Savings’s long-term receivables like home mortgages would drop in value when interest rates rose. Rates on the loan would remain where they were fixed when the money was lent, but the rates that United Savings paid for its deposits would rise with the market. Basically, as long as the average return on loans and other investments equaled or exceeded its deposit expense — its cost of capital — the thrift would be solvent. After a brief respite from the high rates of the late 1970s, rates rose steeply in the early 1980s. United Savings was paying more for deposits than it was recovering from loans and other investments. The thrift and its holding company were losing millions. In 1982, for example, United Financial suffered almost $19 million in losses. Its return on capital was a negative thirty-four percent. The government would later remark that United Savings was “hopelessly insolvent.”

In 1982, Federated Reinsurance — a company of which Hurwitz was the chief executive officer and president — began investing in United Financial Group, the thrift’s holding company. Federated Reinsurance was a wholly owned subsidiary of Federated Development Company. Both Federateds are related to Maxxam only by Federated Development’s owning a majority of Maxxam.

In 1983, Federated and Maxxam bought just under 25% of United Financial’s stock. This enabled United Financial to buy First American Financial of Texas, a holding company of a Houston savings and loan. United Financial then merged United Savings with Houston First American Savings Association, forming United Savings Association of Texas. Despite First American’s precarious financial condition at the time, regulators approved the merger on the condition that United Financial maintain the regulatory net worth of United Savings; that means that it was committing its capital to support the thrift’s solvency. United Financial agreed. Although the FDIC asked for guaranties from Hurwitz, Maxxam, and Federated, they all refused.

After the merger, banks and thrifts across the nation began failing at an average of one each day. Over the next fifteen years, nearly 3,000 depository institutions — banks and thrifts — failed. The savings-and-loan crisis hit Texas especially hard: its thrifts lost $19 billion. Approximately one-third of the banks and thrifts that failed in the nation were in Texas.

4. Late 1985.

In December 1985, Maxxam and Drexel Burnham Lambert, Inc., agreed that, between July 1 and 30, 1988, Maxxam would have the option to buy 300,000 shares of United Financial stock from Drexel for $2,577,000 — a call. If Maxxam did not exercise it, Drexel could sell the shares to Maxxam for $2,577,000 from August 1 to 31, 1988 — a put. Since Maxxam was a “controlling shareholder” of United Financial, under securities and banking law, United Financial disclosed the agreement as the law required. Banking regulators were also told about the deal.

Regulators confirmed that, so long as neither company exercised the option, Drexel owned the shares and had sole right to them. This is important because, at the time, Maxxam and Federated owned just under 25% of United Financial. If Maxxam were deemed to own the 300,-000 shares, then it and Federated might have owned at least twenty-five percent of the holding company, obliging it to maintain United Savings’s regulatory net worth. Since Drexel owned the shares, Maxxam had no net-worth obligation.

In the 1980s, Drexel Burnham was highly successful in using bonds to finance companies that had historically been unable to borrow in that market. It became notorious when its star trader, Michael Milken, was convicted in 1989 for stock manipulation. Milken became a political symbol for dishonest greed on Wall Street. “Junk bonds” was used to denigrate transactions without an understanding of corporate finance generally or credit markets particularly. It was an opaque slogan rather than a analytical tool.

The government would later imagine that (a) Hurwitz’s companies invested in Drexel bonds in exchange for Drexel’s financing his takeover activities and (b) he concealed this arrangement. The FDIC, after a decade of litigiousness, has offered nothing — nothing—to support this charge. This is an illustration of the FDIC’s trial by press release. Keep mentioning Hur-witz and related companies in connection with Drexel Burnham and impugn them in the eyes of the court, public, other regulators, and credit. That is slander as legal leverage. That is wrong.

5. 1986.

In mid-1986, Federated and Maxxam asked to modify the Federal Home Loan Bank Board’s conditional approval of their acquiring control of United Financial, the holding company. Regulators defined control as owning more than 25% of the holding company’s stock; Federated and Maxxam wanted to increase their aggregate ownership of United Financial to 35%. In December 1984, the Bank Board had approved their application so long as the companies maintained United Savings’s net worth — guaranteed its solvency. If they owned more than 25% but less than 50% of the holding company, they would have to contribute funds in proportion to their ownership to maintain the thrift’s net worth. If they owned more than 50% of United Financial, they would each be 100% liable for maintaining United Saving’s net worth.

Federated and Maxxam proposed a modified condition. They offered no guaranty so long as they owned less than 50% of United Financial’s stock. If they acquired more than 50%, they wanted a cap on how much they would have to contribute. In exchange for this concession, they proposed to raise $40 million for United Savings within eighteen months after they acquired control. As part of the deal, United Savings also asked that it be allowed to count proceeds from bond sales in its net worth. The thrift had fallen below its net-worth requirement and was trying to stay solvent.

One of Federated and Maxxam’s concerns was that, even if they acquired less than 50% of the holding company, they would be the only companies who would have to infuse capital into the thrift. This was a serious obligation, especially since they did not have “control of the operations of [United Financial] or [United Savings’s] as minority stockholders.” In addition, investment banks and rating agencies would not be able to evaluate their own financial condition easily based on an open-ended net-worth agreement for United Savings. This would impair their stock prices and credit ratings. Last, Federated’s and Maxxam’s businesses — oil and gas, timber, real estate — frequently required them to raise capital. They were reluctant to enter agreements that would limit their ability to enter capital markets.

Regulators said that, “in light of the depressed economy in Texas,” United Savings’s situation was “not surprising.” Still, the thrift was “one of the stronger financial institutions” in their district. United Savings consistently maintained a higher net worth than other Texas thrifts. Unlike other thrifts whose problems were caused by high-risk, commercial real-estate loans, United Savings still lent money primarily for residential mortgages.

The regulators praised the thrift’s efforts to minimize the effects of the crisis. United Savings was diversifying from home loans to mortgage-backed securities and high-yield bonds. It was generating equal or greater profits than it had been making from mortgages. The proposed bond issuance would also give the thrift “an additional capital buffer” that would shift risk away from the FSLIC.

They cited the thrift’s many strengths, including its strong capital base, diversification, profitability, and access to capital markets. They also noted that troubled banks regularly asked United Savings’s managers for help and that United Savings’s and United Financial’s managers were also the managers of Federated and Maxxam. That Federated and Maxxam were controlling shareholders of United Financial would offer “a source of strength” to the thrift. The regional regulators recommended approval of the Federated-Maxxam proposal and the thrift’s request about the bond proceeds.

6. 1986-1987.

In early 1986, Maxxam bought Pacific Lumber. It owned 44,000 acres of redwoods. Dissident shareholders said that because Maxxam had no cash for the deal, it had had to finance it with Drexel bonds. They said that this would force Maxxam to accelerate logging to pay the debt. They also feared that the value of the standing timber would be eroded by the increased supply to the market. Greens began to protest. Soon the government’s scrutiny of Hurwitz increased, and the regulators’ earlier enthusiasm for United Savings and Charles Hurwitz cooled.

Congressman John Dingell, for example, requested all information on United Savings from January 1, 1987, to the present that the Federal Home Loan Bank of Dallas had. Dingell refused to say why he needed it. It later surfaced that he assumed that Hurwitz was using United Savings to finance acquisitions. Neither Dingell nor the FDIC found a shred of evidence to support this accusation.

In mid-December 1986, the executive committee of United Financial unanimously approved the holding company’s infusion of capital into United Savings to comply with the regulatory net-worth requirement. In late October 1987, it again unanimously approved another infusion.

In 1987, the Texas economy crashed: crude-oil prices plummeted and mortgage defaults surged. Losses at Texas savings- and-loans accounted for more than one-half of the losses nationwide. Of the 20 largest failures, fourteen were in Texas.

In November 1987, Arthur Berner, United Savings’s general counsel, met with Neil Twomey, a regulator from the Federal Home Loan Bank of Dallas. That agency was part of the regulatory machinery. Twomey told Berner about the Dallas bank’s plan to combine failed thrifts and sell them as a package to the highest bidder. The goal was to resolve insolvencies quickly and preserve the government’s funds by not having to liquidate failed banks, paying depositors now and collecting assets eventually. Twomey assured Berner that United Savings would be “a major factor” in the process and would be either asked or told to take on at least one failing institution. The two men also discussed the likelihood of the thrift’s going below its net-worth requirement and its need for forbearance. Twomey suggested how to apply for assistance in a way that would not hamper their planned activities.

Most important, Twomey assured Ber-ner that there was “no question” that United Savings would survive, saying that the thrift was “too big to fail” and that regulators would not let it fail. Twomey praised United Savings’s management, including Charles Hurwitz. He added, however, that “it would have made (and would continue to make) his life easier if Charles Hurwitz had never heard of Redwood trees” but that it was important to have smart business people running Texas thrifts. In a later meeting, Twomey observed that Hurwitz had a “high profile” in Washington.

During this same period, the Dallas bank published several articles about the usefulness of risk-controlled arbitrage and investment in mortgage-backed securities — strategies that United Savings had been using for over a year.

7. 1988.

In January 1988, the FSLIC — the FDIC’s predecessor — began investigating United Savings. Its lawyers were developing a strategy. This was almost a year before United Savings would be placed into receivership.

In February, Hurwitz resigned from the board of United Financial; he had never been an officer or director of United Savings itself. That month, after examining the thrift’s mortgage-backed securities portfolio, regulators concluded that “it appears no speculation is involved” and that “the generated benefits from these type of transactions outweighs the inherent risk associated.” Months later, United Savings was among the 100 thrifts in the nation with the largest mortgage-backed securities holdings. Also in February, the Bank Board introduced the Southwest Plan — the consolidation plan that Twomey and Berner had discussed.

In March 1988, regulators reviewed United Savings’s capital-forbearance application. It recommended that United Savings be allowed to operate below its net worth because (a) its failure to meet its net worth was due to the poor economy; (b) it was well managed; (c) it had a detailed and reasonable plan for rebuilding its capital; and (d) it would furnish regular progress reports.

In May 1988, regulators assessed United Saving’s participating in the Southwest Plan. Two years earlier they had praised Hurwitz as a “smart business man;” they now labeled him a “corporate raider.” They criticized the thrift for investing in mortgage-backed securities and high-yield bonds and decreasing its home-loan activity. Still, the regulators recommended that the thrift participate in the Southwest Plan, pending results of the thrift’s final examination. They expressed internally reservations because Congress was investigating Hurwitz’s dealings with Drexel Burnham. They, however, wanted United Savings to succeed.

In early June, Twomey reported optimistically to Berner that “for the first time, the people in Washington and Dallas were talking about United’s role in the Southwest Plan.” He was extremely optimistic that United Savings would either participate in the plan or receive open assistance from the government.

Twomey and Berner also discussed United Financial’s net-worth obligation. Twomey had written the holding company’s board of directors, reminding them of the company’s net-worth obligation and directing them to make United Financial ensue capital into the thrift. Berner told Twomey that it was impossible for United Financial to do this. Twomey said that he would “as a matter of course” make an official demand on United Financial to infuse capital but that, since he knew that United Financial had no money, this would be a “pro forma requirement.” Twomey told Berner that “if UFG didn’t, what could I do.”

On July 19, Arthur Berner and United Savings president and chief executive officer Larry Connell met with the regulators^ — Neil Twomey, Robert Brick, Ginger Baugh, and Dave Freimuth — to discuss the thrift and the Southwest Plan. The regulators had apparently received criticism from Congressman Dingell for contemplating giving the thrift capital forbearance in light of what he perceived was Hurwitz’s involvement with United Savings. When discussing the thrift’s forthcoming results from its November 1987 examination, Twomey assured Connell and Berner that “once again ... there were no surprises.”

Two days later, regulator Ginger Baugh suggested that United Savings be placed under increased supervision for its “unsafe and unsound practices.” One continued concern was “the adverse national attention given to Charles Hurwitz.” Another concern was “the appearance of conflict” by other officers based on their involvement with other companies, (emphasis added) Baugh did not say that a conflict actually existed, only that one appeared to exist. In the course of her report, Baugh took the opportunity to remind regulators that the thrift had applied to buy 20 institutions through the Southwest Plan.

Eight days after Twomey said that there would be no surprises in the thrift’s examination, he forwarded the results of it to the thrift’s board. The examiners had raised the concerns that Baugh raised in her recommendation. One of their criticisms was the lack of S & L operations — home-loan activity. This, however, was no surprise to Twomey or the examiners. They had long known that the thrift — like other thrifts — was making few home loans: consumers could not afford them, and Congress had intentionally expanded thrifts’ lending authority into non-traditional areas. Regulators had, in fact, praised United Savings for its steering the thrift away from the home-loan market and diversifying its sources of income.

In addition, examiners criticized the thrift for falling below its net worth. Twomey knew, however, that United Financial had no money and that United Savings needed capital forbearance. In late July, he denied its forbearance, despite previously recommending it. He said that the thrift could reapply, if it wanted.

In August, regulators wanted United Savings to consent to be merged, citing all its recent concerns. Also, in August, they expanded the thrift’s examination, despite having reported the last examination’s results only a month earlier. By September, the FSLIC’s lawyers had created a United Savings’s “takedown checklist.”

Also in September, an outside auditor examined United Savings’s books. They had “vastly improved” since a May 1986 examination and were “in most respects, adequate.” The regulators still had concerns about the thrifts’ participation in the Southwest Plan based on its employment contracts for management — an issue that United Savings was resolving; United Financial’s selling its bond portfolios — something that the regulators had wanted it to do; and Dingell’s hostility to Hurwitz. The regulators said that Hurwitz “indirectly controls a significant percentage” of United Financial. Hurwitz himself actually owned 0.006% of the holding company’s stock. He owned a slight majority of stock in Federated, which owned a majority of Maxxam. Based on his involvement in Federated and Maxxam, Hurwitz’s indirect, tertiary personal interest in United Financial was less than 10%. Whether looking at his personal interest in United Financial or Federated and Maxxam’s ownership of less than 25% in the company, Hurwitz did not control a “significant percentage” of it.

Regardless of their concerns, the regulators recommended United Savings’s participation in the Southwest Plan as the best way to recapitalize it. The government invited Maxxam to bid on United Savings in the Southwest Plan. Maxxam did, and in December, the government rejected the bid.

Maxxam’s bid would have cost the Treasury — the taxpayers — $100 million less than the bid that the government accepted. This loss occurred, despite the government’s seeking a better bid from the ultimate “winner” of United Savings — Rani-eri/Hyperion. The government never asked Maxxam to rebid.

Compounding the rejection’s waste, it was illegal. Once the government invites a person to bid on a failed institution and determines that the bid is adequate, that bidder must be awarded the deal. Knowing this, the regulators discussed their need to doctor the records, saying that they “needed more in the record” for rejecting Maxxam’s bid and that “this was the weakest Getty record of any Southwest Plan case.”

A draft report on the Southwest Plan shows the government’s reasons for rejecting Maxxam’s bid — Hurwitz. It would not include his company because of the junk-bond investigation. The lead negotiator for the plan, however, concluded that he had no lawful reason for rejecting Maxx-am’s bid. He was told he could continue working with Hurwitz because “he had capital.” Two lawyers for the regulators said that FSLIC had pressured them to find that Maxxam was an unqualified bidder.

As the regulators fiddled, thrifts lost ground. Without its being included in the package sale or sold to Maxxam, on December 30, 1988, United Savings was placed into receivership. It cost the public $1.6 billion — the fifth costliest thrift failure.

8. Investigation: 1989-1991.

In 1989, Congress abolished the Bank Board and the Federal Savings Loan Insurance Corporation. The FDIC was assigned the duties of the FSLIC. The 1989 act also created the Office of Thrift Supervision to regulate thrifts in the new system. It created the Resolution Trust Corporation to manage the assets and La-bilities of insolvent thrifts.

In 1991, two law firms hired by the FSLIC completed an exhaustive, three-year investigation on possible claims against Hurwitz and other officers and directors for United Savings’s failure. The lawyers concluded that the thrift was not a perfect operation but that “the most serious criticism of the officer and directors, in general, was that they exercised poor business judgment....” They found that:

In view of the consultation and reliance on outside auditors, it will be hard to prove gross negligence or breach of duty unless there was actual fraud and we have been unable to find such evidence.

The proof indicates more than anything else that the directors and senior management found themselves trying to keep the institution afloat....

the directors’ motivation was maintenance of the institution in compliance with the capitalization requirements and not self gain or violation of their duty of loyalty. It will be difficult to show gross negligence on the part of the directors, and the efforts at control undertaken by the officers may not be far from that which would have been undertaken by reasonably prudent person faced with the same volatile market.

They predicted a 35 to 50% success rate on the gross-negligence and breach-of-fiduciary-duty claims against the officers and directors. They said that the agency had less than a 50% chance of success on the claims stemming from Hurwitz’s supposed indirect control of the thrift. Because of his securities expertise, it was not unreasonable for the officers to rely on him from time to time. The case, they said, was rife with uncertainties. They recommended settlement of the gross-negligence and fiduciary-duty claims for $2-3 million. These were versions of claims that the FDIC would later bring, seeking exponentially larger damages.

9. Investigation: 1992-1993.

The government hired another law firm to investigate the thrift’s failure. As limitations approached, the FDIC got its targets to sign tolling agreements. It spent the next two years interviewing — and coercing — former officers and directors. In Arthur Berner’s interview, for example, the government’s lawyer suggested that he “may want to rethink his position” on what the regulators were told about United Savings’s investment portfolio. Berner was an un-indemnified, former employee of the thrift with no “deep pocket.” In the end, the government got the result that it paid for: the firm found that the thrift’s officers and directors had been grossly negligent.

Meanwhile, the FDIC and OTS shared information about the investigation of United Savings’s failure. They agreed to maintain the “privileged and confidential” nature of their materials. In February 1992, the FDIC sent OTS a document entitled, “Possible Enforcement Claims.” The OTS did not act on the document.

In January 1993, OTS revised its procedures for handling thrift failures. Because of budgetary constraints and a large case load, the agency’s chief counsel, Carolyn Lieberman, had to approve new investigations. Regional directors needed to show what goals an enforcement would achieve and when.

10. Debt for Nature: 1993.

In August 1993, Congressman Dan Hamburg of California introduced a bill that would authorize the federal government to buy Pacific Lumber’s redwoods. It authorized California to contribute funds to the purchase and the federal government to exchange for the redwoods other land that it owned.

In November, Congressman Henry Gonzalez — chair of the House Banking Committee — wrote the FDIC and expressed his frustration that the agency had not yet sued. Hamburg’s bill had magnified his concern. Aping Dingell, Gonzalez suggested that the “principals” of Pacific Lumber — presumably Hurwitz — had bought the company with Drexel bonds and caused United Saving’s failure. He even offered the FDIC a valuation of its claim— $548 million — based on a filing by United Financial with the Securities and Exchange Commission.

Three days after Gonzalez’s letter, FDIC officials faxed among themselves handouts from environmental groups. The circular of one anonymous group — whose telephone happens to be at the Mendocino Environmental Center — told the FDIC, “Go get Hurwitz.” The group urged the FDIC to sue Hurwitz for $548 million — an interesting figure — so that he would have to surrender the redwoods to settle. A flyer from the National Audubon Society prodded people to tell their representatives to support the Headwaters bill. Earth First! wanted “Debt for nature and jail for Hurwitz.” Like Dingell and Gonzalez, Earth First! said that Hurwitz had raided Pacific Lumber and caused the thrift’s failure. It wanted the government to sue him for $548 million to force a surrender of the trees.

The same month as Gonzalez’s letter, an FDIC officer sent the Headwaters bill to Jack Smith, the agency’s deputy general counsel. She complained, “Passage would put millions more in Hurwitz’s pocket.” On the net-worth maintenance claim, she wrote, “If it’s not viable, we need to have a reliable analysis that will withstand substantial scrutiny.” Years into the agency’s investigation, it had no factual basis for a claim within its authority. To paraphrase her: we are going to attack him without a legitimate reason, so paper the file.

In December, the FDIC director, Alan Whitney, told Skip Hove, the board’s chairman, that “even if Hurwitz satisfied our claim by giving us the redwoods, it wouldn’t result in what Earth First! (the folks who demonstrated in front of the main building last month) apparently is proposing, i.e., that we then deed the redwoods property to the Interior Department.”

Wrapping up 1993, later that month Counsel Smith wrote Chairman Skip Hove about the investigation of claims against the thrift’s officers and directors and Hur-witz. He relayed, “We are also reviewing a suggestion by ‘ “Earth First” ’ that the FDIC trade its claims against Hurwitz for 3000 acres of redwood forests owned by Pacific Lumber....”

11. Investigation: 199k-

In January, Hove responded to a letter from Congressman Ronald Dellums of California. He said that the FDIC was following debt for nature closely and that it would pursue the redwoods if Maxxam could be held liable for United Savings’s failure.

On February 3, FDIC lawyers met with Congressman Hamburg to discuss the case. Hamburg had an “immediate interest” in a suit against Hurwitz and did not want “this possible avenue” to be lost. The FDIC said that it wanted to enforce net-worth obligations. John Thomas — the lawyer overseeing the investigation — had to concede that the agency could not find a signed agreement between (a) Maxxam or Federated and (b) FSLIC, the agency at the time of the purchase by Federated. Nevertheless, the FDIC’s Smith reassured Hamburg that it was examining the claims of its “most optimistic dreams.” He suggested that if it could “convince other side that we have claim worth $400m, they want to settle. Could be a hook into the holding co.”

A calendar entry from around the same time shows a meeting among Alice Goodman of the FDIC’s Office of Legislative Affairs, Gonzalez, and Hamburg to discuss the redwoods.

On February 4, the FDIC contacted OTS about bringing a net-worth claim against United Financial and Maxxam. The FDIC said that it had “no viable claim” against the holding company and pressed OTS to sue “UFG and perhaps others” by the end of the year because of limitations. It specifically noted:

‘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 Gonzalez 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 ... to discuss the next step and to arrange coordinar tion with our 'professional liability claims.” (emphasis added)

The FDIC says that its contacting OTS the day after the meeting with Hamburg was coincidence. It lies. The FDIC’s last contact with OTS was eighteen months earlier when it urged the OTS to sue Hur-witz, Maxxam, and Federated. OTS did not respond. The only development in the year and one-half was the lobbying by the green groups, Headwaters bill, correspondence from members of Congress, and the meeting with Hamburg the day before.

Also on February 4, Eric Spitler from the Office of Legislative Affairs and Jack Smith discussed what law firm to hire. In the world of the FDIC, the professional-liability section needed advice from legislative affairs on hiring lawyers. Spitler’s email titled “Redwoods” explains why:

I thought about our conversation yesterday. My advice from a political perspective is that the “C” firm is still politically risky. We would catch less political heat for another firm, perhaps one with some environmental connections. (emphasis added)

The agency hired Hopkins & Sutter, where Steve Lambert was a partner in its environmental-law section. Handwritten notes of Robert DeHenzel, an FDIC lawyer, show that the FDIC was assembling an “issue driven” staff for the case. Lambert’s duties were to be “environmental¡trees.” (emphasis original) During the initial interview of Hopkins & Sutter, De-Henzel noted that Lambert had “Lumber experience in Washington, D.C.” He also noted that the firm had “Connections on the Hill and w/other agencies, particularly Interior (Debt for Nature).” (emphasis original)

The professional-liability section is the staff who handle claims against officers, directors, auditors, and other professionals. During his deposition, Jeffrey Williams, the head of professional-liability, swore that “it was completely fortuitous” that Lambert was at Hopkins & Sutter. Williams swore that Lambert’s presence in no way influenced the decision to hire the firm. Incredibly, Williams added that, when the FDIC hired the firm, the agency did not anticipate raising an environmental issue in the case and, therefore, needed no environmental lawyer. Perjury by a lawyer is especially ugly.

At Vice President Gore’s request, Hur-witz met with him that month while “senior members of Congress kept up pressure on the FDIC.” Gore and Hurwitz talked about the government’s buying the redwoods.

In late February, OTS met with the FDIC. Lieberman said that OTS could sue United Financial for not maintaining the thrift’s net worth, but it would need (a) more time to examine claims against Maxxam and Federated and (b) documents from the FDIC. Lieberman also noted a significant limitation on OTS’s ability to bring the case: money. If OTS sued for the FDIC’s benefit, she said “the FDIC would have to make some arrangement with the OTS to offset the agency’s costs for pursuing such a proceeding.”

The FDIC became the target of an “intense lobbying effort by certain environmental activists led by the Rose Foundation.” The Rose Foundation is an environmental interest group. Like similar groups, the Rose wanted a debt-for-nature swap. The Sierra Club also wanted the swap. In April, backed by “its more than 500,000 members,” it wrote the FDIC, urging suit.

Around this time, the Wall Street Journal reported that “the long-dormant federal investigation into the collapse of’ United Savings was “heating up” because of debt for nature. A Hamburg aide said, “The more pressure the government puts on” Hurwitz, “the better our hopes of saving those forests become.” ’ Though the government has objected to this article’s relevance, the FDIC found it important enough at the time to file and comment on it internally.

The day after the article, OTS announced its new enforcement policy. It would undertake only those actions that would strengthen struggling thrifts, prevent their failure, and prohibit the leadership of a failed bank from participating in the industry again. The agency would turn cases seeking restitution over to the FDIC. The FDIC’s vision of an OTS suit for United Savings’s failure — an event from six years earlier — contradicted this new policy.

John Thomas’s notes from around May show the FDIC’s contemplating whether to sue and how to coordinate with OTS. The FDIC wanted more time to examine the merit of its suit as well as OTS’s net-worth claim against Maxxam. The reason was because “Tactically, combining FDIC/OTS’ claims — i/they all stand scrutiny — is more likely to produce a large recovery/the trees than is a piecemeal approach.” The government had “pared the case ‘back’ to $200m.” It cannot explain how it calculated this number. On when to sue, the FDIC said, “If this wasn’t public, the FDIC would do # 1” — that is, “Defer it all, incl. OTS, until (probably) 4th quarter ’94.” The notes continued, “I think we should do it here — but complaints are likely (whatever we do).” Jeff Williams observed that “OTS’ case broader bec/not constrained by [Texas’s statute of limitations], [business judgment] ... may be in our [interest] to stay.” The FDIC has repeatedly argued that it moved to stay to avoid duplicative litigation. William’s notes reveal that to be false. The FDIC wanted to stay because it preferred the administrative forum. It also knew that its case here would fail. Williams also asked, “What is our proof that is more than bad bus. judgmt.?”

In May, the FDIC hired OTS. It agreed to cover OTS’s costs because “OTS faces severe budgetary constraints and that, as a result of these limitations, OTS cannot consider issues which implicate a failed institution to be its first priority.” The agencies agreed that recovery would go to the FDIC. OTS promised that it would submit its investigative plan to the FDIC. After agreeing to do the FDIC’s bidding, OTS papered the record with an insistence that its investigation and decision would be autonomous.

If the FDIC had not suborned the OTS with its subsidy, OTS would have done nothing. Getting the OTS to participate was critical because the FDIC had no claim for United Savings’s failure. In addition, according to the FDIC, its own “claims alone are not likely to be sufficient to cause Hurwitz to offer the Headwaters Forest.” In the words of the Office of Management and Budget, OTS’s claims were needed to “fill in the gap bet[ween] forest value and FDIC claims.”

In May, Chairman Skip Hove promised the executive director of the Sierra Club that he was following the debt for nature issue closely and that “issues involving the redwoods might be brought into play.” Hove received another letter from Congressman Dellums, who advised that he had met with the “team of public interest lawyers” who advocated the debt-for-nature swap. Dellums chastised the FDIC for not having yet sued nor having told him about the debt-for-nature proposal. Dellums forwarded copies of his letter to Gonzalez and Hamburg.

In June, Thomas Hecht, a private lawyer for the FDIC with Hopkins & Sutter, met with Jill Ratner, the founder of the Rose Foundation, for the first of many meetings. Rose’s work would become integral to the government’s case. That same month, Williams noted that there were “2 basic issues surrounding this claim.” These were: the “high level of discomfort on the merits of the claim” and “the subst. political attention focused on this claim.”

In July, Hopkins & Sutter’s Steve Lambert — the lumber lawyer — drafted the FDIC’s talking points for a conference. His memorandum was entirely about the Headwaters bill, its status, implementation, and supporters, of which “34 are on one of the Committees dealing with FDIC.”

The retained lawyers sent Williams a memorandum in mid-July that shows the FDIC’s thoughts about the suit. Counsel remarked that “time did not permit an orderly and thorough investigation of the claims as they now have been delineated.” (emphasis added) By this time, the FDIC had been investigating its claims for over six years.

The FDIC referred to the OTS claims as part of “the case.” Its outside counsel warned that, because of media attention, “there is an overlay of political issues which must be considered.” These considerations included responding to environmentalists and developing “creative” claims against Hurwitz. Again, Williams would later testify that media coverage and pressure from environmentalists did not influence the FDIC.

The memorandum also shows that the agency had no facts to support that the thrift was not viable when it was put into receivership. Up to then, the agency had simply told its experts preparing anal-yses to assume that the thrift was not viable. It now acknowledged that differing opinions about viability were possible, so it needed to “develop the facts relating to [United Savings’s] financial condition” to support that the thrift could not have survived.

The FDIC acknowledged that, “as with our other claims,” the claims against directors were difficult to support. It doubted whether the directors had recklessly disregarded the law. In addition, this was apparently the first time that the agency had attempted to hold directors responsible for losses from market fluctuations. In other words, the agency wanted the directors to have guaranteed that adverse business conditions would cause no loss to depositors.

Other excerpts reveal the weakness of the FDIC’s attempts to link Hurwitz to the Drexel Burnham and Michael Milken scandal:

While two sets of events ([United Savings] junk bond investing and Drexel money for Hurwitz take overs) clearly took place, it is not clear that a firm agreement linked the two together.... Given that others who have examined this area have found no express agreement, this does not appear to be a priority area for inquiry. The Drexel connection with Hurwitz will, however, be of significant use in tainting the independence of [United Savings’s] decision making process, (emphasis added)

The FDIC proposed developing the Drexel link by “meeting with the Rose Foundation attorneys and environmental activists who claim they have useful Drex-el-Pacific Lumber Co. information.”

On the OTS, the FDIC said that the administrative venue was more favorable than federal court. With another bureau, there would be no independent judiciary to slow the regulatory state’s seizure of assets and reputations. The FDIC could have joined the OTS in this action; after all, they are both components of the same entity — the national government. It discussed that although a two-agency suit might be viewed as coercive, hiring OTS was necessary because “having the defendants confront two agencies in different venues adds significant pressure.” The memorandum confirms that the OTS’s declarations of autonomy were a sham.

Given OTS’s limited resources, we must be prepared to develop for them the material they need to move forward. In our prior meetings with OTS we volunteered to develop an overview of the claims and issues along with key supporting documentation.... This outline, along with our substantive discussions with its staff, should provide OTS with a context for pursuing three sets of claims: (i) a net worth maintenance claim against UFG, (ii) a net worth maintenance claim against Maxxam and (iii) claims against [United Savings’s] officials for violations of law or regulations which caused injury to [United Savings].

Last, the memorandum shows the weakness of the FDIC’s net-worth claim — a claim that it eventually brought. The agency admitted that it may have waived the claim because of its dealings with the thrift. Also, it could not explain the contemplated damages of $500 million. The FDIC had simply picked a number — a number large enough to cover Dellums’s suggestion.

In August, Rose’s Ratner faxed Lambert a copy of an article about her from the San Francisco Daily Journal. The article describes (a) Ratner as the author of the debt-for-nature idea, (b) her effort to pin United Savings’s failure on Hurwitz because of his connection to Pacific Lumber through Maxxam, and (c) her plan’s political support from Vice President Gore and Senator Barbara Boxer. The fax is significant for another reason: its cover sheet. The FDIC has not explained how an environmental activist to whom it gave “no serious consideration” knew to what lawyer and at what number to fax the article.

A month later, Ratner sent Lambert a 43-page memorandum exploring the history of Maxxam and Maxxam’s acquisition of Pacific Lumber. Ratner concluded that Maxxam’s using bonds to buy land in California caused the Texas thrift to fail. She arrived at this, saying:

• Maxxam was a controlling shareholder of United Financial and, therefore, controlled United Savings.

• Maxxam’s investing in high-yield bonds breached its fiduciary duty to United Financial and, therefore, to United Savings.

• Because the thrift failed, Maxxam owed the government money. A constructive trust should be placed on Pacific Lumber’s assets for the FDIC’s benefit.

Maxxam, however, owned less than a controlling share of the holding company and no stock in the thrift. It owed no duty to the thrift. In addition, at no time does Ratner explain how Maxxam’s use of bonds to buy land caused United Savings to fail. Ratner’s correspondence shows that, contrary to the government’s assertions, the FDIC heeded the Rose Foundation’s suggestions. Each of Ratner’s points could be addressed; her confusion of facts and law is clear to any non-cause lawyer. It is sufficient to list them so that the parallel between them and the FDIC’s confused assault is obvious.

On October 3, the FDIC and its lawyers discussed the Rose materials. The next day, Rose Foundation lawyers, the FDIC’s outside lawyers, and the FDIC legal staff held a conference call that lasted over an hour. They discussed logging. They also talked about whether published criteria existed for the FDIC board to follow in deciding whether to sue. The agency’s only policy guidelines were whatever the staff recommended.

Days later, Ratner wrote Hecht “in response to your requests for more specific information on current logging within the Headwaters area....” Two days later, Ratner summarized for Hecht recent and pending cases affecting the Headwaters. Richard DeStefano, a Rose lawyer, wrote Hecht a month later about constructive trusts, junk bonds, unjust enrichment, the role of the other United Savings directors, Texas savings-and-loan regulations, and the Endangered Species Act.

Ricki Tigert became chairman of the FDIC board around this time. Tigert’s last name would later change to Heifer. Ratner promptly wrote her about debt for nature. She also sent her the 43-page memorandum that she had sent to Lambert.

In late October, OTS began its investigation of United Savings and United Financial. In late November, the FDIC’s outside counsel sent the OTS a draft notice of charges, a chronology on the net-worth claim against Maxxam, a summary of a regulator’s review of a United Savings real-estate portfolio, and another analysis by the Rose Foundation. The lawyer also mentioned that it was looking at a group of loans that OTS might use for its suit.

In December, the FDIC’s Williams sent to “Bob” — presumably DeHenzel at the FDIC — an article from the Houston Chronicle about off-track betting in horse racing in Texas. The article quotes Hurwitz. Williams observed that Hurwitz was “pushing for” off-track betting in Texas and that he had signed an agreement to turn a Houston building into a gambling casino. He concluded, “both show he’s looking for large cash flows .... ” First, Williams’s note is another snide personal attack on Hurwitz. Second, his implication that it is somehow sinister for Hurwitz or anyone else to look for cash flows is ridiculous.

12. Politics: 1995.

In January, the FDIC met with the National Heritage Foundation, “a group closely associated with the Rose Foundation,” to discuss the debt-for-nature issue.

In February, ten well-known environmental groups wrote Chairman Tigert, Senator Boxer, and Leon Panetta, then-chief of staff to President Clinton. They wanted the government to “make protection of the Headwaters Forest one of the bases of ongoing settlement negotiations in the [United Savings] matter.” Ten days later, the Rose Foundation published additional material about the debt-for-nature swap.

In March, John Rogers, another Hopkins & Sutter lawyer, sent the OTS the documents that he had mentioned in his comments on the notice of charges. Days later, Ratner wrote Allen McRey-nolds, Special Assistant to the Secretary of Interior, to memorialize a conversation that they had had about intra-agency land transfers, including using the FDIC and OTS to extract the redwoods from Hur-witz. Also, California state senator Tom Hayden asked Clinton to pressure the FDIC to bring suit and get the redwoods as partial settlement of the government’s loss on the thrift. He sent along more Rose material.

The Clinton Administration was promoting the swap. Panetta had told an environmental group that the swap was “worth pursuing,” especially since “budgetary constraints” prevented the government from buying the trees “through outright federal purchase.” In June, the National Heritage Institute forwarded to the FDIC Pan-etta’s letter. People from the White House, Forest Service, Interior Department, OTS, FDIC, and the Vice President’s office were now part of the plan to bring actions against Hurwitz and Maxxam to wring the redwoods from them.

During this time, Hecht assessed the Rose Foundation’s proposals and wanted “to memorialize our contacts with these groups and to discuss the options they have urged upon the FDIC and OTS.” Hecht noted the deficiencies of the proposals and said that settlement was the government’s best option.

As the theories have become subject to criticisms, certain of the 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 the redwoods become a bargaining chip in negotiating a resolution. This, indeed, may be the best option available to 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, (emphasis added)

An April e-mail by the FDIC’s Williams shows the FDIC mulling “creative options that may induce a settlement involving the sequoia redwoods in the FDIC/OTS case.” Publicly, the FDIC said that the swap was simply one option that it was considering.

In late April, the agency conceded internally that “we have no claim against Koz-metsky that can survive stat. of limitations.” This was a concession from its earlier position that George Kozmetsky needed to be sued because he was a member of the “Hurwitz’ core group.” Yes, sue him because he was close to Hurwitz; hurt his friends, and he will settle, like Soviet threats to denounce one’s colleagues and family if one did not confess to being whatever kind of scapegoat the government needed at the moment. George Koz-metsky was an outside director of Maxx-am.

The FDIC originally decided to sue Koz-metsky because he was a member of the audit committee. It also noted that he was highly respected businessman who was active in numerous charities. When the FDIC decided not to sue him, it said simply that “alth