Is state's deal to fix up First Executive about to unravel?

Fissures appear in backing for Garamendi's approach

Lawyers for certain bondholders in the First Executive life insurance fiasco have filed a motion in Superior Court to completely unwind the state's controversial rehabilitation plan for the insurer -- and that could ultimately doom a $2 billion profit for French bank Credit Lyonnais, which bought bonds from the insurer's portfolio at fire-sale prices in late 1991.

Importantly too, a group representing ordinary policyholders apparently has broken ranks with state Insurance Commissioner John Garamendi's plan to revive the $8 billion-in-assets First Executive, which the state seized April 1991.

As it stands, it is only Garamendi's rehab plan that is preventing all policyholders and annuitants from being made virtually whole, charged lawyers for the so-called muni-GIC bondholders, a certain class of First Executive annuitants. (Muni-GIC is an acronym for a type of contract annuity, municipal guaranteed investment contracts which can back up municipal bonds.)

"The question is, why is Garamendi opposing our legal motion that would result in policyholders receiving 100 percent of their money? Why is he favoring the French over policyholders?" asked Robert Wallan, lawyer in the Los Angeles offices of Pillsbury Madison & Sutro, which is representing the muni-GIC holders.

Muni-GIC holders and lawyer Wallan contend that if the French were forced to give back the bonds -- bought for $3.25 billion but estimated to be worth at least $5.25 billion -- or equivalent value, then First Executive would be

completely solvent, and able to honor all policyholder claims, at 100 cents on the dollar.

First Executive is the California insurance subsidiary of Los Angeles-based Executive Life, the empire built on junk bonds by financier Fred Carr.

In the 1980s, life insurer First Executive gorged itself on junk, primarily high-yield bonds underwritten by now-defunct brokerage house Drexel Burnham Lambert and its leader Michael Milken, who later was convicted for securities law violations.

In the late 1980s, junk bonds sagged, making First Executive technically insolvent and sending financial chills down the spines of 360,000 policyholders. A policyholder run forced Garamendi to seize First Executive in April 1991.

He then hatched a plan to save First Executive, in part by selling off about $7.56 billion worth (face value) of junk bonds to Credit Lyonnais for $3.25 billion in hard cash. A Credit Lyonnais unit, Altus Finance, did the actual buying. New Yorker and ex-Drexel banker Leon Black is lead adviser to Altus Finance.

A second element of Garamendi's plan was to pay holders of $1.85 billion of First Executive muni-GICs as little as 22 cents on the dollar. These annuities had been publicly traded and had fallen in price.

Regular life policyholders would get about 72 cents on the dollar, under the Garamendi rehab plan.

Under the Garamendi plan -- advertised at the time as a package deal -- French auto insurance company Mutuelle Assurance Artisanale de France would assume the task of running First Executive, after the bonds were sold to Credit Lyonnais.

But the Garamendi plan was torpedoed in March by the state Court of Appeal in Los Angeles, where Judge Norman Epstein ruled that all muni-GIC holders were entitled to equal treatment and that Garamendi's plan was "based on unjustified fiction, and is not supported by law or reason."

Since meeting his legal Waterloo in court, Garamendi has gone back to the drawing boards, promising to "modify" his plan to win court approval.

The financial details of the modified rehabilitation plan were still not public as of last Thursday.

Even so, CoCare, a coalition of employers who purchased retirement annuities from Executive Life, voiced support on Thursday for the modified rehabilitation plan, according to a Garamendi spokesman.

At Garamendi's office, the word was that Garamendi would fight hard to preserve the sale of junk bonds to the French, even if the $2 billion in profit in the Altus Finance portfolio would make policyholders whole. "It is such a ridiculous question that it doesn't deserve response," said Garamendi spokesman Bill Schulz, when asked if Garamendi would move to rescind the sale of bonds to the French. "We think momentum is on our side to building a successful rehabilitation."

Debated last week was whether Superior Court Judge Kurt Lewin would approve rescinding the junk bond sale to the French, and how Norm Epstein, the appeals court judge, would react to whatever Lewin ruled.

By the account of lawyer Wallan, Judge Lewin mused out loud in court last week that Altus Finance was perhaps entitled to fees for managing the portfolio it bought from First Executive, if the deal were rescinded. It is disputed that the deal can be rescinded. Lawyers for Altus Finance have contended that the bond sale to Altus Finance is final, that a contract is a contract.

But Lewin has already shown a certain skepticism of contracts -- for a while, for example, Lewin ruled that some holders of First Executive muni-GIC contracts were not entitled to equal treatment of other contract-holders, because they had purchased the muni-GICs on the open market at a discount. They were arbitrageurs.

Of course, the biggest arb of all would be Altus Finance and Credit Lyonnais, which purchased their bonds from First Executive at 43 cents on the dollar.

It is possible that Lewin could turn his sword now on Credit Lyonnais, if that would make policyholders whole -- and even Credit Lyonnais spokesman don't deny there is a lot of value in the portfolio.

Lawyers for muni-GICs argue that Garamendi's whole deal is now dead, therefore the sale of the bonds to the French is no longer valid, since it was part of the deal.

They further argue that the sale to the French is not entirely valid until approved by the courts, either Superior Court, or the Appeals Court, if a ruling by the lower court is contested.

Meanwhile, the position of Maureen Marr, coordinator for the Santa Monica-based Action Network for Victims of Executive Life, became unclear last week.

Marr had been a supporter of Garamendi's rehab plan, but in the wake of Judge Epstein's ruling shooting down the plan, she has shown signs of breaking ranks -- for example, asking the court if her group could hire its own lawyers and accountants.

In past interviews, Marr has said she regarded Garamendi and his lawyers as legally bound to represent policyholder interests, and therefore she did not need her own lawyers.

However, on April 29 Marr said the court had approved a request to allow ANVEL to hire the San Francisco law firm, McCutchen, Doyle, Brown & Emerson, and that the group planned to do so.