October 11, 1999

EXECUTIVE SUMMARY

On December 26, 1995, the Office of Thrift Supervision (OTS) issued a
Notice of Charges against Maxxam, Inc., Federated Development Co.,
Charles E. Hurwitz, and other individuals,_ to obtain restitution to the
United States taxpayers for $1.6 billion of losses allegedly caused by
the Respondents' violations of federal law in connection with the
failure of United Savings Association of Texas (USAT). In the Matter of
United Savings Association of Texas, OTS Order No. AP95-40. Trial of
these charges began in September 1998, and testimony was completed March
1, 1999. The administrative law judge is expected to announce a
decision early next year. Our analysis of the legal issues and likely
results of the trial appears in the main text of this memorandum, in
Section IV headed MAXXAM'S POTENTIAL LIABILITY TO THE OTS, and is
briefly summarized below.

The purpose of this memorandum is to discuss a proposed transfer of
property into public ownership which would satisfy all of OTS and FDIC
claims against Maxxam, Federated, and Mr. Hurwitz. This proposed
transaction, a "debt-for-nature" swap, would be a final resolution of
the claims allowing Maxxam to escape a potentially disastrous loss.

Much of the land proposed to be transferred is now heavily restricted
for 50 years by a "Habitat Conservation Plan" (HCP) and by California
law (AB 1986 and the related enforcement agreement, together referred to
herein as ìAB 1986î). The HCP and AB 1986 prevent all commercial
logging_ on these lands and all other development, impose substantial
conservation management duties, and pose the risk of significant
financial penalties. The details of the HCP and our analysis of its
costs and risks to Maxxam appear in the main text of this memorandum, in
Section II headed COSTS AND RISKS TO MAXXAM UNDER AB 1986 AND THE
HABITAT CONSERVATION PLAN, and are briefly summarized below.

The Costs and Risks to Maxxam Under AB 1986 and the Habitat Conservation
Plan

The HCP and AB 1986 created 13 areas, totaling about 8,900 acres, for
the preservation of threatened and endangered species, primarily the
seabird known as the "marbled murrelet." These 13 preserves are known
as "Marbled Murrelet Conservation Areas"("MMCAs"). Also established
were many miles of protected strips along certain watercourses, known as
"Riparian Management Zones" ("RMZs"). The RMZs generally are 340 feet
wide, 170 feet on each side of a stream bank, but may be as much as 400
feet in each direction for portions of some watercourses.

Under the HCP and AB 1986, Pacific Lumber (PL), is responsible for
managing the MMCAs and RMZs. This responsibility entails substantial
costs for direct management, and also requires PL to fund one or more
organizations that will serve as an independent third party ìHCP
Monitor.î PL must also reimburse the State of California's costs of
monitoring compliance.

The restrictions on the MMCAs and RMZs are very severe. Essentially no
logging, mining, road building, or other commercial activities will be
permitted for a period of 50 years throughout the MMCAs and in most of
the RMZs. The limited exceptions will require proving that logging or
other activity is beneficial to the marbled murrelet--a nearly
impossible standard. Violation of AB 1986 will entail penalties of 200%
of the value of trees wrongfully cut plus $2,000 per tree. Such
penalties would quickly consume any value in harvesting trees illegally.

In summary, PL must manage and pay for the MMCA nature preserves, for
50 years, without realizing any significant economic utility for the
property, but at significant costs and risks, under the vigilant eyes of
HCP monitors, government, media, and the environmental community.

The Proposed Property Transfers

In this memorandum we discuss several proposals for exchanging
timberlands in fee simple, to public entities, to resolve the OTS and
FDIC claims:

1. A large area transfer resulting in the creation of a public preserve
involving approximately 63,000 acres. This would comprise the
Headwaters Grove and other lands obtained in the Headwaters transaction,
all of the MMCAs, all of the approximately 1,600 linear miles of RMZs,
and all contiguous groves.

2. Transferring into public ownership and securing permanent protection
for the MMCAs and some of the RMZs. This proposal would include
approximately 7,800 acres involving 11 of the 13 MMCAs (excluding
Grizzly Creek Complex and Owl Creek because these two are provided for
by another arrangement whereby the State of California will purchase
them for cash). Of the approximately 1,600 linear miles of the RMZs,
this proposal would permanently protect approximately 20 miles; those
RMZs which connect MMCAs to each other (these connection RMZs are
referred to as ìWatercourse Corridorsî in this memorandum). The
Watercourse Corridors are currently protected to a width of only 175
feet on each side of the stream, comprising a total of about 800 acres.
This proposed property transfer would include expanding the width of the
watercourse corridors to about 600 feet in each direction, comprising a
total of about 2,100 acres.

3. Transferring into public ownership the most sensitive areas
which are now unprotected. There are numerous groves which do not come
under the protection of AB 1986 including the ìHole-in-Headwatersî, the
Mattole watershed, Nanning Creek, and others.

4. Transferring into public ownership certain sensitive areas which
are now unprotected, and which will connect protected MMCAs or other
protected groves.

We believe that before the OTS decision is finalized, the OTS and the
FDIC will reach a consensus, which will have substantial public support,
on the acceptability of a proposed property transfer combining some
elements of the second, third, and fourth approaches. It will involve
11 of the MMCAs, all of the 20 miles of Watercourse Corridors expanded
out to at least 600 feet width in each direction from the creeks, and
some of the now-unprotected areas which will connect now-protected
areas. We predict that this consensus proposal would involve somewhere
between 10,000 and 20,000 acres.

Public support is essential to the success of any proposal. We
recognize that this proposition is a novel solution and will attract a
great deal of attention among the general public, the media, and
environmentalists. Furthermore, any solution must satisfy the American
taxpayers--who have carried the financial burden of the failure of
USATóand must also satisfy their elected representatives.

Of course, the large property transfer would be most desirable from a
taxpayer or an environmental point of view; however, we believe that
Maxxam management and shareholders are unlikely to support the transfer
of so much acreage to the government, unless and until the litigating
agencies achieve a complete victory (the entire $1.6 billion loss to the
taxpayers plus prejudgment interest would exceed $3.0 billion). The
thrust of this memorandum, therefore, is to discuss the elements which
are likely to appear in any proposed property settlement or other
resolution, rather than in satisfaction of a judgment which represents
total victory for the government. In other words, we are here exploring
what would be a reasonable settlement (i) in the current posture, prior
to a decision which is adverse to Maxxam on the OTS or FDIC claims, or
(ii) following a decision against Maxxam in favor of the OTS based on
the grounds of violation of the net worth maintenance covenants (which
would involve an award of approximately $560 million) with the FDIC
claims still unresolved, or (iii) following a decision in the FDIC case
(which we value at $250 million for the purposes of this memorandum)
with the OTS claims still unresolved.

In discussing valuation of the property proposed to be transferred, we
argue that the severe restrictions on most of that property, for 50
years, mean that the present value of the property to the Company is
very low, regardless of what the value would be if the property were
unrestricted. In contrast, the settlement values of the OTS and FDIC
claims are high. The OTS claims relating to net worth maintenance, if
established, are worth $560 million. The FDIC is claiming any portion
of the total loss, $1.6 billion plus interest, not recovered by the
OTS. We value the total claims of the OTS and the FDIC for settlement
purposes at about $810 million. (Please see the main text, Section III,
under the heading THE PROPOSED PROPERTY TRANSFERS.)

Maxxam's Potential Liability to the OTS

The OTS Charges Against Maxxam and Hurwitz

In Appendix A: ìDescription of OTS Charges Against Hurwitz and Maxxam,î
we outline in substantial detail the massive Notice of Charges (a
document 140 pages long, containing 13 separate claims for relief). The
main allegations are summarized as follows:

Maxxam and Hurwitz violated their net worth maintenance obligations.

USAT's purchases of junk bonds from Drexel were illegal transactions
with an affiliated entity.

Maxxam and Hurwitz engaged in unsafe and unsound banking practices, and
made false and misleading statements while speculating with USAT's
mortgaged backed securities.

Maxxam and Hurwitz caused USAT to enter in sham transactions with its
subsidiary for the purpose of inflating USAT's gains, hiding its losses,
and deceiving regulators.

Maxxam and Hurwitz caused USAT to make unsafe and unsound investments
and loans.

Maxxam and Hurwitz recklessly disregarded the law and were unjustly
enriched.

In this memorandum, we limit our discussion to the violations of net
worth maintenance obligations and the ìunjust enrichmentî of Maxxam that
resulted.

Liability for Violating the Net Worth Maintenance Obligations

In our view, the OTS will prevail at the current administrative trial
on the charges relating to the net worth maintenance violations, and the
decision of the administrative law judge will be upheld by the director
of the OTS. The key facts are that Maxxam's predecessor, MCO Holdings,
Inc., and its affiliate, Federated Development Co., jointly applied to
the Federal Home Loan Bank Board in 1983 for permission to take control
of United Financial Group, the holding company which owned 100 percent
of United Savings Association of Texas. Permission was granted on
several conditions, the relevant one to this discussion being that
MCO/Federated must maintain the net worth of USAT. Specifically,
MCO/Federated was obligated to contribute a prorata share of capital if
it acquired as much as 25 percent of UFG.

After receiving this conditional approval, MCO/Federated undisputedly
held 23.9 percent of UFG. MCO/Federated made a ìput-callî arrangement
with the investment bank, Drexel Burnham Lambert for an additional
300,000 shares (about 3.6 percent) (the ìDrexel Optionî)._ The OTS
claims and Maxxam denies that MCO/Federated controlled these Drexel
Option shares, because all of the economic risks of ownership were on
MCO/Federated.

In addition to the Drexel Option shares, Drexel owned much more UFG
stock, its total stake being about 9.7 percent during the relevant
time. The OTS claims and Maxxam denies that MCO/Federated controlled
these shares as well because MCO/Federated and Drexel ìacted in concertî
to control UFG. Specifics of their concerted action include the Drexel
Option mentioned above.

Aside from the arithmetic of share ownership, the OTS claims and Maxxam
denies, that MCO/Federated exerted ìcontrolling influenceî over UFG.
Charles Hurwitz and other individuals affiliated with him held senior
executive offices,_ and in fact controlled UFG.

OTS further argues that Maxxam and its predecessors were unjustly
enriched because they accepted the benefits of control of USAT,
particularly the cozy relationship with Drexel that enabled Maxxam to
finance the acquisitions of Kaiser Aluminum and Pacific Lumber, but did
not take responsibility for the failure of USAT and the resulting $1.6
billion cost.

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Karla James
The Rose Foundation
for Communities and the Environment
6008 College Ave., Suite 10
Oakland, CA 94618
510/658.0702 v
510/658.0732 f
kjames_rose@earthlink.net
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