Is Garamendi's First Exec junk bond sale deal dead? Court setback may spell doom for $3 billion pact.

Torn asunder last week in the state appeals court in Los Angeles was California Insurance Commissioner John Garamendi's plan to rehabilitate fallen life insurer Executive Life -- and ironically, now 360,000 policyholders have a better chance of being made whole than ever before.

Of key parts of Garamendi's plan, Appeals Court Judge Norman Epstein wrote, "It is based on unjustified fiction, and it is not supported by law or reason."

And the talk of the financial town: Will the courts ultimately up-end a $3.25 billion fire sale of junk bonds Garamendi engineered almost two years ago?

Garamendi, in October 1991, crafted a plan that transferred $7.56 billion of Executive Life's junk bonds to a French group, Altus Finance, in exchange for $3.25 billion cash.

Altus Finance, an arm of bank Credit Lyonnais, was advised by a pair of New Yorkers, the former Drexel Burnham Lambert star Leon Black and Craig Cogut, a lawyer. (Those bonds have appreciated by perhaps $2 billion or more since the sale.)

Then, as part of the October 1991 Garamendi package, the remaining assets and the Executive Life company were to be turned over to Mutuelle Assurance Artisanale de France, known on the continent as an auto insurer. MAAF was to contribute $325 million to Executive Life and operate the insurer.

Under Garamendi's plan, Executive Life policyholders would have gotten 72 cents on the dollar of their policy values five years hence, and 55 cents if they cashed out immediately.

Another group, known as muni-GIC holders (muni-GIC is an acronym for municipal guaranteed investment contracts which can back up municipal bonds), were to receive as little as 22 cents on the dollar.

But Appeals Court Judge Epstein, leading a tripartite panel, bashed Garamendi's plan, both because it illegally discriminated against the muni-GIC holders, and because junk bond values have risen so much -- but those values are not reflected in the Altus-MAAF deal.

There is no legal foundation for treating the muni-GIC holders differently -- "the unjustified fiction" -- and a new deal, with current asset values, must be struck, ruled Epstein.

Muni-GIC holders last week heaped accolades upon the Epstein ruling -- and said they now want to rescind the first sale of junk bonds to Altus Finance. "We are taking steps to unwind the sale of bonds to Altus Finance. The original sale of Executive Life was linked to the purchase of the insurer, and the ongoing operation of the company -- but that (original deal) is dead now," said Mark Oberhofer, vice president with Smith Barney Harris & Upham, who was been advising institutional holders of muni-GICs.

If the Altus Finance junk bond hoard can be returned to the fold, then the muni-GIC holders, and 360,000 policyholders, and another 300,000 pensioners, who have corporate pensions financed in part by annuities with Executive Life, could almost be made whole, said Oberhofer.

There is about $1.8 billion of muni-GICs outstanding, a type of tradable annuity issued by Executive Life. The muni-GIC holders have waged a fierce, two-year-long legal war against the Garamendi plan, led by Robert Wallen in the downtown L.A. offices of Pillsbury Madison & Sutro. Last week Wallen said that MAAF would have to pay a lot more for Executive Life.

Even the remaining assets of Executive Life have appreciated from $5 billion to $7.6 billion, according to documents submitted to the court. And that doesn't count the Altus Finance portfolio's surge in value.

Philip Warden, also of Pillsbury Madison & Sutro, last week vowed to file a motion to have the $3.25 billion bond sale to Altus rescinded, and said he "was going to try get all the policyholders 100 cents on the dollar." He said the motion would be filed "by the time your readers get the newspaper."

But Ken Heitz, lawyer with Irell & Manella who represents MAAF, said it would be nearly impossible to rescind the Altus bond sale.

"In my judgment, there is zero chance the sale can be rescinded. It is final and closed," he said. More likely, said Heitz, was that Garamendi would modify his plan, and the new plan would be approved by all parties and courts.

Bill Schulz, spokesman for Garamendi, also said a new plan would be readied and submitted to the court.

Too, said Heitz, the Altus-MAAF deal has already been modified a bit, to retain profits on the existing Executive Life portfolio for policyholders. Heitz said policyholders might get 77 cents to 80 cents on the dollar of policy values.

But Warden, of Pillsbury Madison, said even 72 cents was a high figure on policyholders, given the present value of money and the five-year wait policyholders face before getting their dough.

The Executive Life brouhaha stems back to the collapse of Fred Carr's First Executive Corp. in 1991. Carr's two subsidiary insurers, Executive Life of California and Executive Life of New York, had gorged themselves on junk bonds, which tumbled in value in the late 1980s and early 1990s. Many of the junk bonds were underwritten by Drexel Burnham Lambert and some by Leon Black, the adviser to Altus Finance.

Junk bonds made up a large portion of the Executive Life portfolio -- so large, that by early 1991 the fate of Executive Life was unclear. By April 1991, policyholders were making a run on Executive Life, and Garamendi placed the insurer into receivership.

Most policyholders have had their money locked up ever since. Last week, Maureen Marr, coordinator for the Santa Monica-based Action Network for Victims of Executive Life, a group of policyholders, said she hoped for a quick resolution to the Executive Life problem, as policyholders have been waiting so long already.

Marr is paid $300 a day for her services by the Executive Life estate, fees which are approved by Garamendi and the courts. Marr said this posed no conflict of interest, and that she was not part of the Garamendi team. "I represent policyholders. Everything I do is in public," she said.