Man in a Glass House

"As head of one of the world's largest insurance companies, I live in a glass house." So last week said a shaken Carrol Shanks, president of the Prudential Insurance Co. What shook Shanks was that his glass wall had been suddenly and rudely pierced by some mighty embarrassing gazes. With the business world still buzzing over Chrysler Corp.'s conflict-of-interest troubles (TIME, Aug. 22), Shanks was shown, in a Wall Street Journal article, to have been the buyer of valuable timberland for Georgia-Pacific Corp., a Prudential borrower and the biggest U.S. plywood producer, in a complex deal that could save him as much as $400,000 in income taxes. At week's end, the New Jersey Banking and Insurance Department, watchdog of the Pru's home state, was looking into the transaction to see if there had been any violations.

The Journal sprang its surprise after Reporter Ed Cony visited the Georgia-Pacific Corp. to do a story on the integrated lumber industry. Back in June, the New York Times had reported the deal between Georgia-Pacific and Shanks in a story that gave no figures, caused little comment. But that was before the Chrysler furor. When Reporter Cony pieced together the deal's details, the Journal put the story on Page One.

Plastered on $250,000. As top man at Prudential for 14 years, strait-laced Carrol Shanks, 61, has long had official dealings with Georgia-Pacific. The Pru has lent Georgia-Pacific more than $50 million, now finances about a quarter of the company's long-term debt. In turn the Prudential, which owns 90,900 shares of Georgia-Pacific common stock, has profited richly from the company's rapid rise (sales up 281%, profits 1.177% since 1953). In 1956 Shanks became a Georgia-Pacific director.

Shanks's unofficial dealings with Georgia-Pacific began one day last year when he and G.P. Chairman Owen Cheatham, 57--also a Prudential director--were chatting about tax savings. "I was looking for a deal where I could make a good capital gain." says Shanks, "because I take such a plastering from taxes on my $250,000 salary." Cheatham thought he might have just the thing: buying timber holdings and then selling the timber to Georgia-Pacific. Shanks's lawyers assured him that there would be no conflict of interest. In May, Shanks met with officials of Georgia-Pacific and the Timber Conservation Co. at the Bank of America in San Francisco, of which the ubiquitous Cheatham is also a director. They completed the vastly complicated deal in four hours.

One-Day Loan. The Timber Conservation Co. owned 13,000 acres in Oregon that Georgia-Pacific wanted. Carrol Shanks bought Timber Conservation on the spot for $8,592.000. financed by a one-day loan from the Bank of America. Minutes later, he liquidated the company, sold its 13,000 acres to the Coos Bay Timber Co., a wholly owned subsidiary of Georgia-Pacific for $4,400,000 (plus a small plot back to the Timber Conservation interests for $208,000). Next he put up $100,000 of his own money, borrowed another $3,900,000 from the Bank of America on a five-year term. With the money from the sales, he paid off the one-day loan and covered the transaction fees. Shanks kept ownership of the timber on the land.

In return. Coos Bay contracted to cut and pay for enough of the Shanks-owned timber during the next five years so that Shanks would be able to pay off and meet the interest on his Bank of America loan, get back his $100,000--and save as much as $97,000 a year on taxes through write offs on interest payments and through timber depletion allowances and capital gains savings. Chief advantage to Georgia-Pacific: it does not tie up capital in the trees (on which Shanks takes the risk of forest fire, etc.), pays only when it fells them.

Never Again. Unlike Chrysler's Newberg. Shanks later informed the Pru's finance committee, which raised no objections (the Pru does not handle short-term loans itself). Georgia-Pacific's'Cheatham calls the Shanks deal "just a way of helping the company." The Journal also turned up the fact that Cheatham, in addition to all the other suits he wears, is co-owner of Oregon's Old Dominion Co., an investment firm that owns timber that Georgia-Pacific has contracted to cut under a deal like Shanks's. Carrol Shanks maintains that "there is not the slightest violation of ethics" about his deal. Nonetheless, the furor that greeted the publicity has already taught him that, for people who live in glass houses, discretion should be worth more than tax savings. Says Shanks: "I'll never have private dealings again with a company that does business with Prudential."

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