In 1995, the French government chose to rescue a bank at a cost of $35 billion which had secretly and illegally acquired another firm earlier that decade without regulators noticing. The bank falsified financial statements and had been drifting towards riskier activities for years. Making this story even more surprising was that all this illegal and dangerous activity had taken place at a storied state-owned bank that been in business for well over a century, Crédit Lyonnais. The bank’s cavalier attitude to risk and the law was exposed when its illegal ownership of a large American life insurance business came to light.

Executive Life and Junk Bonds

           The story of Crédit Lyonnais’s troubles begins with a struggling California life insurance firm with no previous connection to the French bank. The Executive Life Insurance Company was a holding company that ran insurance subsidiaries in the states of California and New York. These subsidiaries in turn sold insurance in many other states. By the 1980s, Executive Life was run by adventurous executive Fred Carr, who joined the company in 1974, when it was still a small and ailing firm. Under his leadership, Executive Life began to sell a popular single-premium deferred annuity with a high implied rate of return starting in 1978. Some customers were firms looking to satisfy their pension obligations with these deferred annuities, impressed by their high returns and their potential to lower the costs of pension programs.

           The high returns however, were enabled by an investment portfolio that consisted of lower quality ‘junk’ bonds with higher yields. When Fred Carr joined Executive Life, junk bonds were not investments one would expect to find in insurers’ portfolios. However, in the subsequent years, this began to change, in part due to the work of Michael Milken and the investment bank Drexel Burnham Lambert. Milken helped transform the market for low grade bonds and so his firm led the growth in the junk bond market in the 1980s. Drexel Burnham Lambert made a market in otherwise illiquid bonds and Milken proved adept at finding buyers for large quantities of lower quality bonds. Executive Life was one of these eager buyers.

           Executive Life was willing to take greater risk with respect to more than just its investment portfolio; it was also subject to frequent regulatory condemnation. In America, insurance is largely regulated at the state level and the Executive Life Insurance Company had past run-ins with its regulators in both California and New York.

           In one instance, California regulators realized the firm was overstating its financial health and demanded it raise more capital. New York regulators had three of the firm’s top executives removed after various regulatory breaches and financial irregularities. However, the company’s many customers and the regulators in other states where the company sold insurance were not notified of these issues. On top of all this, Executive Life was also being investigated for potential involvement in the securities laws violations that would soon send Michael Milken to prison.

           In the late 1980s, the euphoria for junk bonds had slumped. There were rising defaults by lower quality bond issuers and these bonds made up nearly half of Executive Life’s assets. In 1988, to reduce the amount it had to set aside for loss reserves, the company swapped $700 million in bond holdings for securitized collateralized bond obligations with the same underlying bonds but which could receive higher credit ratings. Seeing no change in its actual risk exposure, California regulators forced the company to reverse this maneuver in 1990.

           The company’s troubles were by now becoming more widely known. Executive Life had reported its biggest annual loss in history in 1989 after writing off $1 billion in value from its investment portfolio. Some nervous policyholders surrendering their policies, demanding to receive whatever cash value their insurance contracts entitled them to. The firm reported another large loss for 1990 and filed for bankruptcy in April 1991 after California and New York regulators took over the firm’s insurance subsidiaries and froze their assets, preventing more policyholders from surrendering their policies. On the eve of its failure, Executive Life had roughly 400,000 policyholders and $13 billion in assets, 65% of which were in junk bonds.


           Looking to provide some recovery to policyholders, the state of California put the insurer up for sale. There was a willing buyer. A consortium was created to purchase what remained of Executive Life for $3.25 billion in 1991. Among the leading participants was Crédit Lyonnais, then a very large state-owned French bank. Crédit Lyonnais was interested in acquiring the defunct firm’s junk bond holdings through its subsidiary Altus Finance.

           However, the bank couldn’t just purchase the bond portfolio alone. California regulators demanded that any eventual buyer purchase the entire firm in whole. This was an even bigger hurdle than it might at first seem. At the time, it was illegal in the United States for a bank to own an insurance company, or any other sort of non-banking firm. Further, California prohibited foreign-government owned entities from controlling insurance firms in the state.

           Crédit Lyonnais engineered a way around the rules. A French insurance firm was convinced to act as the official buyer of Executive Life but it was Crédit Lyonnais, which really controlled the acquired firm under a form of legal agreement known in France as portages. The agreement was kept secret and Crédit Lyonnais covered up its participation in the consortium for years. The bank even brought in other investors, paying them to participate and guaranteeing them the return of their investment, to further appear disassociated from the acquisition. The bank may have made about $1 billion from buying the assets of Executive Life; including other consortium participants, the total profit amounted to $2.5 billion

Crédit Lyonnais

           This may seem like an aggressive maneuver for a long-standing public-owned bank in many ways directly answerable to the French Finance Ministry. Crédit Lyonnais was founded in 1863 and was nationalized in 1945. In this period of state control, the bank expanded into riskier investments in real estate and other sectors. This had put the firm at risk of failing at about the same time as the Executive Life collapse. After its clandestine purchase of Executive Life, the bank would itself have to be bailed out. It received a $35 billion rescue from the French government, the largest bank bailout at the time, when the latter established a new entity in 1995, the Consortium de Realisation, to purchase the bank’s riskier assets. The assets moved to the Consortium de Realisation included the bank’s ownership of the old Executive Life.

           As at Executive Life, the troubles at Crédit Lyonnais were not only financial. The bank had its own governance problems. Years later, in the early 2000s, several individuals were convicted of falsifying the bank’s financial statements. Some of the accused were exonerated though and these included none other than Jean-Claude Trichet, who had earlier served as French Finance Minister and soon after this case went on to serve as President of the European Central Bank. By now, Crédit Lyonnais was no longer owned by the state, having been privatized in 1999.

Investigation and Settlement

           While it likely hadn’t known what its firm was up to when it secretly led the acquisition of Executive Life, the French government learned about the deal during its investigation of the bank’s broader problems. This information was not shared with American regulators though. Nonetheless, the American Justice Department became aware of the scheme after a disgruntled French businessman alerted them of Crédit Lyonnais’s role in the purchase of Executive Life. The bank was thereafter subject to a five-year investigation. Finally, in July 2003, Crédit Lyonnais, the Consortium de Realisation, and various executives of the bank were indicted with 55 counts of conspiracy, fraud, money laundering, and lying to their regulator, the Federal Reserve. The indictment threatened the bank and the Consortium with a loss of $3.1 billion in the form of forfeitures of illegal profits.

           In the end, the bank and its fellow defendants, with some intervention from the French government, pled guilty and agreed to pay a $771 million fine instead. At the time, this was believed to be the largest monetary settlement in any criminal case in American history. Crédit Lyonnais specifically was fined $200 million and the Consortium de Realisation paid another $375 million which was allocated to compensate former Executive Life policyholders. The balance of the settlement came from a handful of other defendants. That same year, Crédit Lyonnais was acquired by competitor Crédit Agricole for $20 billion.


           Crédit Lyonnais had been in business for well over a century until it found itself at the center of an international financial scandal. The bank was the recipient of what was then the largest bank bailout in the world and was among the parties to the largest criminal settlement in American history. When financial firms have gotten into trouble before and since, it is usually for financial reasons. Of course, that was part of the problem at Crédit Lyonnais as well. Nonetheless, the Executive Life purchase, though encouraged by the allure of the failed insurer’s junk bond portfolio, reveals more than a surprising readiness to accept financial risk. For a bank owned by a government, it sure had its own governance problems, and the company was also surprisingly willing to test the law and regulators. In many ways, it was the most compatible partner to Executive Life.

More from the Tontine Coffee-House

           The 1990s also saw the restructuring of the insurance marketplace Lloyd’s of London. Also, consider subscribing to this blog’s newsletter here.

Further Reading

1.      “Credit Lyonnais and Others to Plead Guilty and Pay $771 Million in Executive Life Affair.”, Federal Bureau of Investigation, 18 Dec. 2003.

2.      Crowney, Paul. “Inside the Crédit Lyonnais Scandal.” Institutional Investor, 11 Nov. 2003.

3.      Kristof, Kathy M. “Behind Executive Life’s Fall: Regulators Are Taking the Heat for Letting the Insurer’s Problems Go On, Entrapping Thousands of Its Policyholders.” Los Angeles Times, 1 Sept. 1991.

4.      “The Executive Life Affair: A Tangled Web.” The Economist, 27 Nov. 2003.

Comments (1)

  1. Ken Romanowski


    Another great blog. I remember in the 1980s, corporate raiders replacing pension obligations with annuities. I seem to recall Executive Life was one of the companies used for that purpose.

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