August 28, 2003

NYT Says Credit Lyonnais Indicted Re Executive Life Asset Buy

Sealed Indictment Is Said to Charge Bank With Fraud (New York Times, August 28, 2003). The reported federal indictment of Credit Lyonnais in Los Angeles is the latest chapter in the 1991 collapse of Executive Life, a California insurance company that failed as the value of its junk bond portfolio dropped. The company was acquired by investors, the bond portfolio by Credit Lyonnais. At the time, the bank was owned by the French government, said the Times. Allegations later surfaced that the investors who bought the company were actually straw men for the bank, which could buy the bonds, but could not acquire the insurer due state law and the federal Glass-Steagall Act (partly repealed in 1999 by the Graham-Leach-Bliley Act). A federal investigation and a civil suit by the California Insurance Department ensued, and the indictment by the United States is the latest step in the process, indicated the Times. (more ... )

An Feb. 25, 2002 Insurance Journal article, "Decision Nears for Credit Lyonnais in Executive Life Case" includes more details about the case. In 1991, Executive Life, says the Insurance Journal, was the largest life insurer based in California, covering 340,000 insureds with $10.1 billion in assets. It also had enormous debts and went broke, in part because much of its capital was invested in "junk bonds" whose value crashed with the stock market in 1987.

On behalf of its creditors, the California Insurance Department (the statutory liquidator then under Commissioner Garamendi) accepted a bid for the company by a French firm that later turned out to be controlled through undisclosed intermediaries by French financier François Pinault. Later, some thought the price inadequate and criticized Garamendi. Garamendi failed re-election and his successor, Chuck Quackenbush, launched an investigation and lawsuit based on state law. Federal investigations also began for violation of the Glass-Steagall Act, said the Insurance Journal.

(Quackenbush resigned effective July 10, 2000, following a California Assembly investigation triggered by staff attorney disclosures that also led to changes in the California bar rules about in-house counsel's role as whistle blowers. Garamendi is once again the Insurance Commissioner of the State of California.)

Coincidentally, what book did I get from the West Hartford library yesterday? Yes, correct: Shulte, "The Fall of First Executive - An Insider's Account of the Biggest Insurance Failure in History." (1991) So much to read, so little time ...

Posted by dougsimpson at August 28, 2003 08:13 PM | TrackBack