Friday, July 4, 2014

Reflections in Blue and Green, 2

                              

                               The Deal

It had been going on since the end of World War II. As Supreme Commander for the Allied Powers in the Pacific after World War II, Gen. MacArthur, eager to see Japan's government and industry restored, put into effect some draconian measures. Among them was the dismantling of the zaibatsus, the powerful, interlocking government, banking and industrial entities that ran Japan before Pearl Harbor and were credited with nudging the country into conflict. 
    The rise of labor unions there led MacArthur to lift restrictions on Japanese business, part of official United States policy to encourage opposition to Communism that included covert financing by the Central Intelligence Agency of the rightist Liberal Democratic Party in Japan.
An obscure figure named Tadao Sasyama, who had helped liquidate the zaibatsus, was made head of the Forest Resources General Countermeasures Council in Japan, to bring timber to that country, whose forest reserves had been halved. Sasayama was told by General Headquarters in Tokyo that cheap timber might be found on distant, dimly-envisioned Alaskan shores, where the head forester was in search of a market, and that the forester and his government were willing to make a sweetheart deal.
This was Japan's first venture abroad after the war, and a contract was issued in 1953 to the newly-created Alaska Lumber and Pulp Co., Inc. that became Alaska Pulp Corporation, a wholly owned subsidiary of the Alaska Pulp Co. Ltd., based in Tokyo. A second, similar contract went to the Ketchikan Pulp Company, a subsidiary of the thoroughly American Louisiana Pacific, with very little risk capital required by obliging American officials.
More than 100 Japanese companies and individuals had a stake in the Alaska Pulp Corporation, backed by the Japanese government and its directors who were none other than the principals of the Forest Resources General Countermeasures Council, with the shadowy Sasayama again in charge. The pulp mill was built at Sitka in 1957, and later a sawmill at Wrangle, both in Southeast Alaska. There were several 50-year contracts, the final one to run from 1961 through 2011, and they say volumes about the government's ideas of inexhaustible old-growth timber and the benevolence of corporations.

Five billion board feet were to feed the symbol of the new, vital, competitive Japan. The original deal allowed the APC and the Ketchikan Pulp Company (KPC), to pay only a fraction of the value of the timber for 10 years, on the assumption that the price would eventually rise with the market. It never did. But let the Forest Service tell it: "The development of APC was based on the architecture of pre-war Zaibatsu," wrote the authors of a study prepared by the Forest Service in 1987, the Alaska Pulp Corporation Validation Report, known simply as the Zaibatsu Report. "The offering of APC stock was designed to embrace all of the leading companies dealing in timber products."                    
The Forest Service's study indicated that APC was set up to distribute assets to its Japanese associates and never intended to make money. Any profits attained by APC were available for distribution to the Japanese shareholders who "were the very individuals [to which] APC sold the products acquired from its subsidiary companies," not genuine trading entities but representatives of "the modern-day Zaibatsu Groups."
The advantage of this lay in the price for Tongass timber paid by the companies. APC, like KPC, had exclusive rights to inexpensive timber in return for operating the pulp mill; the so-called "free market price" of future stumpage was pegged to profits. But through its interlocking network of Japanese controlled timber and mill operations, chemical fiber, pulp and paper companies and their subsidiaries, APC distributed the proceeds from Sitka spruce, hemlock and pine until there was no revenue left, hence no requirement to reimburse the American taxpayer.
These purchases were not "arm's length" transactions as required by law but instead kept the price paid by both APC and KPC for Tongass timber well below market value. About one thousand board feet cost the Japanese about what a hamburger cost and never climbed to more than three dollars, whereas independent operators paid on average between $40 and $60 and sometimes much more. In extreme cases, the pulp mills paid as little as $1.40 for prime Sitka spruce used in making quality musical instruments that was worth $3,000 on the open market.
   Forest Service accounting practices were no match for the sophisticated APC operation, had the Forest Service been interested in thwarting it. The service's pricing formulas were irrelevant, starting with the artificial selling value and then subtracting manufacturing costs, harvesting costs, a profit and risk allowance that guaranteed APC an additional 12 per cent to 18 per cent profit. Only then did it reach the bottom of the pricing barrel where stumpage rates were set.
The Forest Service did not act on its own recommendations in the Zaibatsu Report for correcting all this, nor did it release the report to the public. Today the Forest Service will not even admit to its existence. After the 1992 election, the Forest Service did begin to make adjustments in APC's access to Tongass Timber, yet at the time the zaibatsu report appeared, the remainder of the APC contract was still valued at about $800 million. It is impossible to say how much money had been taken off the Tongass by APC and KPC since the Fifties. The mills had paid essentially one price for timber, while its real value rose almost 3,000 per cent, more than any other commodity on earth.                     

The chairman of APC, George Ishiyama, born in America, graduated from UCLA in 1936 with a degree in economics but retained close contacts in Japan. After the war he acted as middleman in America and Australia for the transportation of raw materials to Japan, and later became American adviser to the Industrial Bank of Japan. Although he owned a home in Palo Alto, he spent most of his time in Tokyo. He took over the presidency and chairmanship of the board of APC in 1983; because he had been a friend of the founder, he said, he would take no salary.
Two years later he spoke of APC's "financial hemorrhage" due to difficulties in obtaining timber from the Forest Service on an "economic basis" and requirements to improve the quality of waste water from the Sitka mill going into Silver Bay. At the time, the company was in acrimonious negotiations with the United Paperworkers International over wages, benefits and working conditions, all of which had been declining for years. APC had been convicted of conspiring with the Ketchikan Pulp Company to restrain trade and had steadily obtained concessions from its own workers in the process. Despite its public contention with the Forest Service over the price and supply of logs, the company continued to entertain ranking Forest Service brass at Japan House in Sitka. But it was in the environmental realm that APC attracted the most attention.
In 1989, the Alaska Department of Environmental Conservation charged the mill with violating terms of a permit for a solid waste landfill by dumping excessive sludge from the mill. Masses of this organic waste product from the pulping process regularly appeared on the surface of Silver Bay, along with discharges of gas from waste decomposing on the bottom. In 1990, the United States Environmental Protection Agency looked into APC's disposal of its fly ash, which was contaminated with dioxin and other toxic substances. This went into the air, into the landfill and into the bay, after being mixed with waste water and flushed directly through the mill's sewage system.
In 1991, the company allowed 15,000 gallons of acid known "red liquor," another by-product, to flow directly into the bay. The EPA fined the company $432,000 for violating federal toxic substance, hazardous waste, and reporting laws, but APC's environmental problems continued. In September, 1993, the EPA charged APC with violations of clean air standards, and a few days later a spokesman for the mill announced that it was closing.                      

George Ishiyama had been in charge for a decade. APC faced flat prices for its pulp, a reluctance by the new administration in Washington to go along with the company's continuing demands for undervalued timber, court challenges from conservation groups over its timber cutting, lawsuits by former employees, and a possible environmental disaster. The closing eliminated 400 jobs in a city of about 8,500 people and violated the terms of the long-term contract. The company's offer to convert the mill for the manufacture of medium density fiberboard, which required fewer workers and less pollutants, and to renegotiate its agreement with the Forest Service, was denied, and the 50-year contract cancelled by the Clinton administration.
APC threatened to file a claim in federal court for compensation from a government that had heavily subsidized it for so long. The company claimed a total operating loss of $163 million on the mill, $31 million of that in the previous fiscal year. But in 1992 the Forest Service had lost $23 million on the Tongass by its own calculations, and $64 million by outside estimates, the largest such deficit in Forest Service history. The following year the service ran up an even greater loss. How both the service, and APC, could be losing money on so much exported timber and timber products puzzled more than a few people.
Then in May, 1994, during preliminary proceedings in a lawsuit brought by a former APC employee, revelations about Ishiyama's finances emerged: he had received a $20.7 million bonus in 1993, the same year APC claimed losses of $31 million. The money came from one of APC's subsidiaries, AP Financial, Inc. It was further revealed that Ishiyama was also chairman of Japan Resources Corp. and its subsidiaries, Japan Resources Ltd. and JR Financial Inc., all heavily involved with APC. Somehow the chairman of APC, during the decade when his company was supposedly suffering great financial problems and the Forest Service's Tongass's operation producing unprecedented flows of red ink, had created a stock empire.                   
                      (Next: Hoonah)                 
 My travel books, The Kingdom in the Country and Vanishing America, can be found at: http://www.fearlessbooks.com/Conaway.htm
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