Headwaters Forest and Citigroup
The Headwaters Forest, located about 15 miles southeast of Eureka, California, is made up of 60,000 acres of ancient redwood and Douglas-fir trees. In addition to magnificent 2000-year-old trees, such forests are home to such rare and endangered species as the marbled murrelet, a small seabird who nests deep in the canopy of old-growth trees, and the tiny spotted owl. The undisturbed groves also preserve the water quality of streams necessary for the survival of the coho salmon, currently listed as threatened under the federal Endangered Species Act. Combined with an additional 140,000 acres, including six smaller ancient redwood groves, these acres make up the land holdings of Pacific Lumber Company and comprise the most ecologically important, privately held and unprotected stands of ancient redwoods left in the world.
In 1985, Charles Hurwitz's Maxaam Group Inc. bought Pacific Lumber through a hostile and legally questionable takeover for approximately $900M in junk bonds. Immediately upon purchase, Hurwitz doubled the rate at which the old-growth trees were being harvested, in large part through a widespread application of destructive clearcutting practices. The company claimed that the accelerated harvest was necessary to boost cash flow in order to service payments on the takeover debt. But this level of carnage wasn't quite enough. Citibank, through its subsidiary Salomon Smith and Barney, began working with Hurwitz to re-leverage the enormous $900M debt incurred during the purchase of Pacific Lumber through establishing an even higher rate of harvest in Pacific Lumber forests.
In 1993, Salomon Smith and Barney invented a nefarious new form of "natural resource" security on debt instruments. In the case of Pacific Lumber, such instruments were dubbed "timber notes," with the collateral value being based on a promised rate of tree felling in Pacific Lumber forests. But before doing so, Pacific Lumber spawned a subsidiary, Scotia Pacific Holding Company, which was given control of nearly 200,000 acres of second growth redwoods, with Pacific Lumber retaining control of the Headwaters Forest and other high profile groves. Timber noteholders would receive payments over the life of the note based on harvest sales to Pacific Lumber from Scotia Pacific's less contentious and relatively less environmentally sensitive redwood holdings. Under this financing scheme the forests would no longer be managed at a rate which recognized their natural ability to regenerate, but instead would be required to be cut down at a rate far exceeding any conceivably sustainable level of harvest. In 1998, Salomon Smith Barney managed the offering of yet another set of timber notes, with the initial aggregate principle amount worth nearly $900M.
The results of such financial manipulations haven't taken long to manifest on the ground. In 1992, Pacific Lumber twice illegally logged old-growth redwoods in the Owl Creek Grove, thereby violating the Endangered Species Act. The company has violated the California Forest Practice Rules more than 325 times since 1995. Such practices have resulted in human disasters, such as a mile-long mud slide in California's North Coast community of Stafford in January of 1996 that was tracked back to a Pacific Lumber clearcut and which destroyed seven homes and severely damaged seven others. Pacific Lumber has also been issued Cleanup and Abatement orders by the Regional Water Quality Control Board for destroying the domestic water source for Elk River residents through erosion and sediment runoff. After chronic violations of California's forest protection laws in 1997, Pacific Lumber was issued a provisional license by the California Department of Forestry to cut timber during 1998. Most violations concerned careless logging operations during the wet winter months, as well as the failure of Pacific Lumber to control erosion throughout the entirety of its 200,000 acres of forestlands. Pacific Lumber's 1998 provisional license was again suspended after another long list of forest practice violations was attributed to its 1998 harvest operations.
Citibank, through its subsidiary Salomon, Smith and Barney, facilitates such rash and lawless behavior through the offering of leveraged debt instruments like timber notes which force the accelerated liquidation of natural assets. Unfortunately, it appears that many more transactions based on debt instruments collateralized by a predetermined rate of natural resource extraction are beginning to enter the market. Citibank must reconsider the longterm utility of creating financing tools which by their very operation neglect to recognize the importance of professional natural resource management. Ensuring that such management when implemented actually serves to protect ecosystems like the Headwaters Grove is another matter entirely.
(C) Rainforest Action Network