France’s Credit Lyonnais (CL) and the Consortium de Réalisation (CDR), a French government agency established to handle the bank’s debt mountain in 1995, have agreed with federal prosecutors in Los Angeles to pay aprroximately $575 million in order to settle criminal charges against the bank and various associated companies surrounding the takeover of Executive Life in 1991.
The principle charges accused CL of using an elaborate network of affiliates to handle the transaction, including Artemis, the holding company of French billionaire François Pinault. The purpose was to avoid violation of the Glass-Steagle Act, then in force, which prohibited banks from participating in the management of insurance companies. CL also allegedly violated California statutes, which prohibit foreign governments from investing in domestic insurers, as it was majority owned by the French government when the Executive Life transaction occurred.
A recently announced Grand Jury indictment (See IJ Website August 28) seems to have convinced French authorities that CL stood to lose too much, including its license to operate in the U.S., if the charges were proven. While no firm details have yet been released, pending the preparation of formal documents, news reports indicate that the CDR will contribute around $100 million and another French bank, Credit Agricole, which is in the process of acquiring control of Credit Lyonnais, will pay another $100 million in fines and penalties, allowing CL to keep its banking license.
In addition the CDR will reportedly contribute $350 million to a fund that could be tapped by Executive Life policyholders. French insurer MAAF Assurances, which supervised the reorganization of Executive Life that eventually created Aurora National Life Assurance, has reportedly agreed to pay $35 million into the same fund. Assuming all these obligations are met, the criminal charges would be dropped.
That would not end the matter, however, as CL and its associates face civil suits, notably one brought by California Attorney General Bill Lockyer, seeking over $3 billion in damages. Even if no guilty plea is entered, the settlement sets a rather ominous precedent for the civil suits.
Ironically CL won’t actually have to pay anything, that burden will mostly fall on French taxpayers, as the CDR is a government agency funded by general revenues. It was originally set up to sell off and liquidate some 15 billion euros ($16.25 billion) in CL debt, following a disastrous expansion spree in the late 80’s and early 90’s. Its obligations are now estimated at around 10.8 billion euros ($11.7 billion).
The settlement did not sit well at all in France. Most commentators referred to it as out and out blackmail. In an editorial in the French financial newspaper Les Echos Henri Gibier pointed out that the $575 million was roughly half the sum the largest Wall Street investment banks were required to pay as a result of their phony investment advice violations during the dot com bubble. He indicated that the whole thing seemed very much politically motivated, and recalled, as have many other commentators, that apparently no one else was willing to bail out Executive in 1991.
As a French taxpayer, I do rather resent being forced to contribute to a settlement that appears barely justifiable. The Glass-Steagle Act has been repealed, and as far as I know, while the policyholders may have suffered some losses, it would have been much worse if no one had come forward to take over Executive. There’s also the added distinct possibility that future recoveries in the civil actions will add to this burden, and will end up mainly enriching the lawyers who filed them.