How State’s Junk Became French Riches

When fears of a financial meltdown stalked John Garamendi’s first hours as California’s newly elected insurance commissioner a decade ago, his search for a white knight seemed solved by an eager French financier riding to the rescue of a state insurance power crumbling under the weight of bad junk bond investments.

But now, tarnished by years of accusations that he and his French backers lied and cheated to make billions in profit from the 1991 collapse of Los Angeles-based Executive Life Insurance Co., the onetime white knight has offered new details of how that controversial deal came together.

Jean-Francois Henin, who in 1991 was president of a small subsidiary bank of French giant Credit Lyonnais, said in an interview here that he and French investors encountered raw political motives from the outset of negotiations. He said Garamendi acknowledged privately he hoped to use the Executive Life bailout as a springboard to higher office. Garamendi denied that political considerations were a factor in his decisions.

Henin said the French banks were led into the deal by some of the same American junk bond experts who sold the controversial portfolio to Executive Life in the first place.

And Henin blamed technical errors and jealous rivals for the legacy of litigation, second-guessing and criminal investigations that followed the multibillion-dollar bailout of Executive Life that he helped to engineer.

Henin’s first interview with an American newspaper comes as he and French officials anxiously await word about whether the U.S. Department of Justice will file criminal charges against him and the formerly state-owned Credit Lyonnais.

The escalating controversy threatens to inflame U.S.-French relations and complicate Garamendi’s bid for a political comeback in California.

A key issue is whether the French bank filed false documents to hide the fact it eventually held secret interest in the California insurance company exceeding the 25% share allowed under U.S. banking laws of the time. Also, because the French bank was government-owned at the time, its ownership position may have violated California laws against foreign control of insurance companies.

While such suspected violations are decidedly technical, investigators are pondering whether they were part of a broad conspiracy to deliberately deceive regulators and help the French acquire the ailing insurance firm and its junk bond assets at a bargain-basement price.

Recently, the California attorney general’s office filed a $2-billion civil fraud case against the bank, alleging that 300,000 Executive Life policyholders were cheated out of billions in the takeover. And the U.S. Federal Reserve is considering whether to ban Credit Lyonnais from operating in the United States, where it has an estimated $200 billion in assets--a potentially devastating move the French fear could even injure their national economy.

In response, the French government has led a concerted lobbying effort all the way to the White House, trying to deter criminal charges and the most punitive sanctions. The French foreign minister personally lobbied Secretary of State Colin L. Powell. And President Jacques Chirac reportedly broached the subject with President Bush during Bush’s recent trip to Europe.

Some members of Congress have bristled at the foreign pressure, including Rep. Howard L. Berman (D-Mission Hills), who urged U.S. Atty. Gen. John Ashcroft to disregard French lobbying.

How the Deal Came to Be

So, how did such a seemingly good deal go so bad? Indeed, how did what Institutional Investor magazine once dubbed “The Deal of the Year” turn into what California prosecutors now call “a conspiracy of deceit”?

For Henin, a 57-year-old investment genius regarded here as “the Mozart of finance,” Executive Life’s depressed junk bond holdings represented an opportunity for the bank to invest in what he believed was the coming rebound in the U.S. economy. If he was not alone in that confidence, no one else stepped forward to outbid him.

Garamendi helped celebrate the deal by presiding over a contract-signing party at the exclusive Chasen’s restaurant on the Westside, but Henin says gratitude soured to full-blown resentment as the economic recovery he anticipated arrived. The sickly junk bonds soared in value, producing profits in the billions of dollars--mostly for the French.

“The only victims are those who missed the opportunity to invest and are now trying to make claims with the benefit of hindsight,” Henin said.

He defended his role in the deal during extensive interviews after declining earlier invitations to meet with federal prosecutors. He said a French criminal law restricts his contacts with U.S. officials investigating a case involving French national interests.

Henin denied any intentional violations of U.S. banking laws. In fact, he said Credit Lyonnais surrendered hundreds of millions of dollars in unrealized profit by divesting its interest in the insurance company solely to comply with federal rules the bank now is accused of flouting.

“If we were willing to make money cheating the American laws, we could have found a way to keep at least a billion dollars more,” he said.

Garamendi, too, defended the original deal--to a point. He dismissed as “revisionists” the critics of his decision to sell off the junk bonds on the eve of a bull market.

“If it was so obvious that a market boom was coming, why didn’t we get better bids?” he asked.

But allegations of secret Credit Lyonnais interest in the restructured insurance company prompted an icy warning: “If they lied to me, they’ll pay,” Garamendi said.

For Garamendi, who recently announced he again is seeking election to the same insurance commissioner post he left for a failed gubernatorial bid seven years ago, the lingering controversy could bode political ill.

Henin, for one, considers that an ironic twist. From their first meeting in Sacramento it was clear--”even to a Frenchman,” he said--that the California commissioner had his eye on the governor’s office.

“He [Garamendi] said he wanted to save the company, then run for governor,” Henin recalled. And from the beginning, he said, the matter was “a mix of economic crisis and political goals.”

Executive Life Insurance achieved industry prominence with spectacular growth in the 1980s under the leadership of Fred Carr. The company offered high-paying annuities and insurance policies made possible by Carr’s initial successes investing in high-yield junk bonds.

Much of that portfolio was acquired through junk bond king Michael Milken. But after the junk bond market collapsed in 1989 and Milken went to prison for securities fraud, the insurance company’s fortunes fell as well.

By early 1990, Executive Life disclosed losses from junk bonds approaching $800 million. By the end of the year, the stock of parent company First Executive Corp. had plunged from $16 a share to just 16 cents a share.

Executive Life Became Political Issue

Worries that Executive Life was hurtling to insolvency figured in the 1990 campaign for state insurance commissioner, the first election for the post that previously had been a gubernatorial appointment. Garamendi, a Democratic state senator, sought to replace the latest in a succession of GOP-appointed commissioners.

Meanwhile, in France, Henin was picking up early signals of an impending economic surge in the United States. The former corporate treasurer of French company Thomson recently had become the managing director of Altus Finance, the financial arm of Thomson after it was acquired in 1990 by Credit Lyonnais.

Henin’s mandate was to use the Altus subsidiary to position the powerful but stodgy Credit Lyonnais organization to be more nimble and take quicker advantage of changes in the global economy. The bank also was feeling pressure to improve its books after a series of disastrous investments.

Representing a new breed of French entrepreneur, Henin told the Wall Street Journal at the time: “The riches of the world are in its garbage cans.” And scanning the financial landscape in 1991, Henin spotted opportunity precisely where Garamendi found trouble: in Executive Life’s plummeting junk bond portfolio.

Henin had help finding that particular “garbage can” through a partnership with former Milken associate Leon Black. It was Black’s familiarity with the contents of various troubled junk bond portfolios that guided Henin’s judgment concerning where to invest.

Black “knew the best portfolios because he sold a lot of those bonds to Carr in the first place,” Henin said.

In one case, Black waved off Henin’s interest in a $3-billion Bankers Trust junk bond portfolio, telling the French financier, “We can do better.”

Henin’s impatience mounted. Anxious that the U.S. economy would soon soar without him, Henin wanted a major stake in the country’s markets as fast as possible. Big, depressed junk bond portfolios offered a potentially lucrative shortcut to such a stake.

Finally, Black hooked Henin up with Executive Life’s Carr. With billions of dollars from Altus Finance, they proposed buying the bond portfolio. Such a sale would generate funds to shore up and rehabilitate the insurance company, but it would require regulatory approval. Henin hurried to Sacramento in mid-February 1991 to present the plan to Garamendi.

Henin recalled that the newly installed insurance commissioner’s reception was friendly.

“He said our plan was very interesting, but he said that if we attempted a private rehabilitation plan we would be killed by the lawyers. He told me I had no idea how bad American lawyers can be.”

Henin said he also concluded that his plan was too similar to those backed by a previous commissioner and opposed by California’s new chief regulator.

“Mr. Garamendi said, ‘I’m a Democrat,’ and he wanted to show that his Republican predecessor was incompetent and that he was the savior,” the financier said. And at that meeting, Henin said, Garamendi advised him that he planned to seize control of the insurance firm.

Differences of Recollection

Garamendi said he rejected Henin’s original deal because it was not comprehensive and would have left “too many people holding empty bags.”

As for Henin’s assertions that Garamendi had partisan political goals, the former commissioner said flatly: “His interpretations are incorrect.”

Two months after Henin met with him in Sacramento, Garamendi did take control of Executive Life, placing it under state conservatorship. The next step was to restore stability by cashing out the volatile junk bonds.

Henin, with partner Black and a deep pool of French bank funds, immediately launched an aggressive bid to buy those bonds through a state-supervised auction refereed by the courts. Ultimately, Henin agreed to $3.25 billion.

But Garamendi, he said, also wanted help separately finding investors and management for the insurance company and its portfolio of policies. That would turn out to be the road to trouble, by Henin’s account.

“We had no interest at all in the insurance business,” Henin said. “But I agreed to help find a buyer. I said, of course, Credit Lyonnais had relationships with many insurance interests.”

It was, he said, an investment in goodwill; a public relations gesture. If Garamendi was grateful for his help, perhaps that gratitude could be conveyed to other state insurance regulators around the United States who faced similar problems and were selling off discounted bond portfolios, Henin reasoned.

Attorney Gary L. Fontana, representing the California Insurance Commission in another lawsuit against Credit Lyonnais, scoffed at Henin’s claim. He said the French were after the insurance company because it offered a big return on investment: at least $400 million to $600 million.

“That’s the kind of public relations gesture we’d all like to make,” he said.

Fontana asserts that the junk bond and insurance company purchases were always intended to be one deal and that the French committed “deliberate deception and fraud . . . to induce Garamendi” to accept what Fontana charges was “an illegal bid.”

The Insurance End of the Deal

In the spring of 1991, the French insurance firm Navigation Mixte, a client of Credit Lyonnais, agreed to take over the Executive Life insurance business. However, before the deal could be concluded, a German insurance conglomerate acquired the French firm, forcing it to withdraw.

At the last minute, Henin said, he found another French insurance firm to participate in the insurance end of the Executive Life deal: Mutuelle d’Assurance des Artisans de France (MAAF). But time was short, and MAAF’s board of directors was conservative. Henin said management of MAAF wanted assurances that if upon further review the deal was not good enough, MAAF would be protected.

A private agreement was reached between MAAF and Altus/Credit Lyonnais guaranteeing that the bank would buy back MAAF’s interests if necessary. That side deal, called a “portage agreement,” would become the source of greatest controversy.

Protecting the confidentiality of that secret deal would lead to allegedly false filings and false declarations with state and federal regulators.

Still, French acquisition of the insurance company itself remained nothing more than a glimmer in the eyes of investors. Neither MAAF nor Credit Lyonnais yet held any actual interest in Executive Life because it remained under state control with its pending reorganization subject to court approval.

Other formalities advanced, however. A holding company was incorporated to gather investors for that moment when the resurrected Executive Life sprang to life in some new organizational incarnation. At the time, though, it was an empty shell awaiting an operational insurance company.

“Our U.S. lawyers were fully aware of the fact that we were assembling an investor group at the request of Mr. Garamendi,” Henin said, insisting it was a friendly request, not a legal quid pro quo.

As Executive Life’s resurrection grew nearer and it became clear that ownership restrictions under U.S. bank rules were a problem, Credit Lyonnais went shopping for another French financier outside the banking and insurance business.

Eventually, when Executive Life was reborn in 1993 as Aurora Life, a deal already was in the works to transfer ownership to French mogul Francois Pinault, one of the country’s richest men, and his company Artemis. But because the deal’s closing was hung up over last-minute hitches, Credit Lyonnais ended up controlling shares of the insurance holding company for a few months, which appeared to violate U.S. banking laws.

Henin dismisses it as an unintentional technical violation and says that, regardless, the bank never exercised any ownership rights over Aurora after it became operational.

Investigators are likely to greet Henin’s claim skeptically because they regard the allegedly false filings concealing that controlling interest as a serious cover-up.

At the same time, any potential prosecution case cannot be helped by one significant change in the legal landscape since the deals closed: Congress has repealed laws restricting bank ownership of insurance companies, completely abolishing the 25% limit.

On the civil litigation front, the California attorney general and insurance commissioner’s office seek to recover for Executive Life policyholders and investors some of the profits that went to the French.

“But the French didn’t run Executive Life into the ground--its own management did that,” said one of Henin’s defense attorneys, Brian Sun of Santa Monica. “The French didn’t sell off the assets--Garamendi did that. All the French did was offer the highest price.”

And realize extraordinary profits.

Henin acknowledged that Pinault’s profits from the Executive Life investments--a combination of junk bonds and the insurance policy business--may already exceed $2 billion. Through convertible bonds acquired in the deal, Pinault ended up holding a controlling interest in such prominent businesses as Samsonite luggage and Florsheim shoes.

Henin said Credit Lyonnais also profited by about $700 million from the deal but would have earned at least twice that had it not sold off substantial interests to Pinault in complying with the now-rescinded U.S. banking laws.

As for Henin, he said he did not even get a bonus for his successful efforts. After closing the deals, he left Altus and Credit Lyonnais to serve as a Pinault consultant. Accepting a bonus from any side, he said, posed conflict of interest dilemmas and he declined the fees when they were offered.

“This way I never had trouble sleeping at night,” he said.

Henin has since left the banking and securities world entirely to monitor bulls of another sort at his cattle ranch in Burgundy.

‘The Deal of the Year’

The specials that summer night at Chasen’s, the restaurant of the stars near Beverly Hills, included French versions of chicken, veal and whitefish. But for the group of financiers gathered in a private dining room, the main course was dollars and francs.

Amid champagne and celebratory toasts, Garamendi thanked Henin for coming to the rescue of Executive Life and its policyholders. That night in August 1991, the French financier still was Garamendi’s white knight.

After a series of formal contract signings, the ebullient state insurance commissioner retrieved a copy of the evening menu and, with another flourish of pen and ink, scrawled a personal note to Henin:

“Jean-Francois--May our deal be good for all involved.”

A decade later, despite billions of dollars in profits to those Henin brought into “The Deal of the Year,” his soft baritone renders a terse, contrary verdict: “It’s a nightmare.”