Crédit Lyonnais

THE FRENCH banking giant's bailout of California-based Executive Life Insurance Company (ELIC) was called “superb” by state officials in 1991, but by 1999 investigations revealed a scheme by which the bank profited through concealed ownership. Like many 1980s investors looking for dramatic gains, ELIC had invested heavily in junk bonds: high-yield, high-risk bonds issued by companies that are likely to default. Using junk bonds to fund corporate takeovers and restructuring had fueled the rise of investment house Drexel Burnham Lambert, which sold ELIC much of its portfolio. After Drexel Burnham collapsed, so did ELIC's investments, resulting in the largest insurance company failure ever.

California Insurance Commissioner John Garamendi chose Crédit Lyonnais's offer over that of a San Francisco-based group because the French company promised a four-cents-on-the-dollar higher payout to ELIC's policyholders. The gist of the deal was that Altus Finance, an investment house in which Crédit Lyonnais was the majority owner, bought ELIC's junk bond portfolio for $3.25 billion. A French insurance consortium, Mutuelle Assurance Artisan de France (MAAF), invested $300 million in ELIC and assumed management of the company. A few other ELIC assets were sold. Garamendi touted the new insurance company, called Aurora National Life, as “one of the best-capitalized and safest insurance companies in America.”

Less than four years later, it seemed that buying ELIC's junk bond portfolio had been one of Crédit Lyonnais' few wise moves. After Altus Finance posted substantial losses in 1993, the French government provided a $4.4 billion bail-out of the state-owned bank. This was not sufficient to reverse a trend of losses caused by reckless investments. Beneficiaries of Crédit Lyonnais' generosity included Italian investor Giancarlo Paretti, whose default on loans to buy Metro Goldwyn Mayer studios left the bank with a $2.5 billion investment in Hollywood, and a two-year deadline to divest it. The bailout ultimately reached $20 billion.

In 1999, an anonymous whistleblower forwarded to San Francisco attorney Gary Fontana documents showing that the rescue of ELIC had involved illegal “parking” agreements that allowed Crédit Lyonnais to profit at the expense of policyholders. The trail was complicated. Under the Glass-Steagall Act, a foreign bank could not own an insurance company. Although it was known in 1991 that Crédit Lyonnais financed MAAF's acquisition of ELIC, the bank had signed agreements that it would neither own nor run Aurora National Life. However, MAAF had agreed to act as a front for Altus Finance, the Crédit Lyonnais subsidiary that bought the junk bond portfolio. By separating the two deals, Altus not only circumvented the law but also was able to keep hundreds of millions of dollars in profits from the rebounding junk bond portfolio, rather than sharing the bounty with Aurora policyholders.

Near the end of 1992, maturing bonds meant that Crédit Lyonnais would own a controlling share in several U.S. companies. Forced by law to own no more than a 25 percent stake in any U.S. company, Crédit Lyonnais sold the ELIC junk bond portfolio to Artemis, a company it had formed with one of its largest debtors, multimillionaire François Pinnault. Crédit Lyonnais owned 40 percent of Artemis and had lent the company $2 million so that it could buy the portfolio. In essence, Crédit[Page 230] Lyonnais was funding its sales to itself. Artemis also received all of Crédit Lyonnais' parked shares in Aurora and, when the parking agreements expired, bought the insurance company.

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