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Thursday, Feb 22, 2024

oped #2

For years, the press has been telling the heartrending tale of doomed old-growth redwoods in Northern California that are about to be chopped down by a greedy corporation owned by a Wall Street raider, all for the sake of paying off some junk bonds.

Maxxam Corp., goes the story, bought the ecologically sensitive, benignly paternalistic, family-owned Pacific Lumber Co. in a leveraged takeover, and sharply increased the redwood harvest rate to generate cash needed to pay the interest on the bonds it issued to pay for the acquisition.

That story has been repeated so often in the media that it by now appears to be incontestably true. But its accuracy leaves much to be desired. True enough, Maxxam, a company controlled by Texas financier Charles Hurwitz, acquired Pacific Lumber back in 1985, and is harvesting trees at a faster rate than did the old PLC management. But that’s as far as the hard facts go.

A recent paper (soon to be published in the Journal of Financial Economics) by two University of Southern California finance professors, Harry and Linda DeAngelo, analyzes the press coverage of this story, and reaches a conclusion dramatically at odds with the prevailing media depiction. If the DeAngelos are correct and their paper appears well documented the PLC story may only be another instance of tendentious pack journalism.

First, the old Pacific Lumber Co. was no ecologically warm and fuzzy, mom-and-pop operation when Maxxam bought it. At the time, PLC’s founding family owned less than 5 percent of its stock and held only one seat on its board of directors. PLC stock traded on the New York Stock Exchange, with institutions holding some 44.4 percent about average compared to other publicly traded companies.

Before the Maxxam takeover, PLC was harvesting fewer trees because its management evidently underestimated its timber holdings. The DeAngelos say PLC had not done a timber cruise since 1956, and at the time of the Maxxam takeover, it actually owned 30 percent more timber and 45 percent more standing old-growth redwoods than its old management thought. Hurwitz, on the other hand, had done aerial surveys, and knew better.

But make no mistake, the old PLC was not keeping old-growth redwoods as pets. By 1985 it had logged some 91 percent of its acreage, and was logging virgin forest at the rate of 1,200 acres per year. If left alone, PLC would have logged all its virgin forest (including the prized 3,000-acre headwaters stand of old-growth trees) by 1999 or thereabouts.

PLC’s old management acted for the same rational economic reasons that motivate all redwood lumber companies. Not only do old-growth trees provide superior lumber that brings higher prices, but also they no longer grow so making room for growing younger trees by harvesting the older, fully grown ones is good business.

PLC’s past selective cutting was inspired more by tax laws than by love of environment. A 1947 California law (former Revenue & Taxation Code Sec. 259.6) provided that forest land could be removed from tax rolls if 70 percent of the standing timber on it were felled, and PLC cut just that amount until 1978, when the law was repealed. PLC then went back to clear-cutting on a limited basis.

Nor is it accurate that after the takeover, PLC stepped up its harvesting rate to pay interest on the junk bonds issued to finance Maxxam’s purchase. The DeAngelos point out that PLC operations (plus tax benefits from the leveraged takeover) generate enough cash to service the bonds without an increase in the pre-takeover rate of harvesting.

The old PLC had low debt and was paying high dividends, so from a financial management point of view, it didn’t take a rocket scientist to figure out that for the new PLC to increase corporate debt and pay out some of its income as deductible interest on bonds was a smart tax planning move that increased the value of the company.

Besides, in the early 1990s most of Maxxam’s high-yield bonds were called and replaced with higher-grade, lower-interest bonds, thus eliminating the alleged reason for the increased tree cutting.

In short, the PLC management harvested old-growth redwoods in accordance with its economic self-interest, and continued doing so after the Maxxam takeover. Both old and new management cut redwood trees for a living.

And so it appears that the press has been fingering the wrong villain in this tale. In fact, it is the ethics of radical environmentalists who successfully propagated a distorted picture to the gullible press. Of course, environmental ends are important, but they have to be balanced against constitutionally permissible means, and ultimately must stop short of violating the guarantees of the Bill of Rights.

The press has much explaining to do here. The DeAngelo study raises the painful question of whether the public has been misinformed by reporting that has presented only the radical environmentalists’ distorted version of this controversy, overlooking in the process inconvenient facts, constitutional doctrine, and the substantial competing equities of PLC’s owners, employees and bondholders. But then again, speaking of news, what else is new?

Gideon Kanner is professor emeritus at the Loyola Law School in Los Angeles, and of counsel to the Santa Monica law firm of Berger & Norton, which represents the Pacific Lumber Company in its inverse condemnation action against the federal government.

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