The Sword Hanging over Credit Lyonnais

Can the French government rescue the bank again?

The hottest seat in European finance has to be Jean Peyrelevade's. The chairman of France's Crédit Lyonnais is fighting for his bank's independence: The early July expiration of a pact among core shareholders not to sell leaves the institution vulnerable.

Peyrelevade is also fighting for his reputation. He is given credit for rebuilding Crédit Lyonnais after past mismanagement but still can't shake a scandal stemming from its purchase of a failed California insurer called Executive Life Insurance Co. 10 years ago. Claiming Crédit Lyonnais fraudulently gained control of Executive Life, California's state Insurance Dept. is suing the bank. And in Washington, the Justice Dept. is winding up a grand jury investigation that could result in the bank's criminal indictment. The Federal Reserve could also fine Lyonnais or lift its U.S. banking license.

For all these pressures, Peyrelevade--whom the bank says isn't at risk personally of an indictment--seems cool and calm in an interview. The Executive Life deal? "It's heavy, it's sad, and it has lasted a long time. But I am not a pessimist." The takeover threat to Crédit Lyonnais? "It's true, `independent' is not a word I'd use in the long term for Crédit Lyonnais. But why rush into negotiations now when our results and our market capitalization will be increasing over the next [few] years?"

One reason for Peyrelevade's calm may be a fresh strategy to resolve the Executive Life affair. An all-out effort to avoid a federal criminal indictment is under way, featuring a new actor: the French government, which has finally thrown its weight behind the bank. On June 26, lawyers representing France, Crédit Lyonnais, and the Consortium de Realisation, which assumed its bad assets, met with Fed officials. French Foreign Minister Hubert Vedrine has discussed the case with Secretary of State Colin L. Powell. President Jacques Chirac and Prime Minister Lionel Jospin are expected to raise the matter with the White House. Lyonnais officials don't expect Justice to act until September.

The issues date to 1991, when the California Insurance Dept. seized Executive Life after its $9 billion junk-bond portfolio collapsed. The state sold the bonds to Altus Finance, then a Crédit Lyonnais unit. A new entity, Aurora National Life Assurance Co., ostensibly owned by French investors, bought Executive Life's insurance portfolios, since banks couldn't own insurers under the now-repealed Glass-Steagall Act. But according to documents filed in the case, Lyonnais controlled Aurora via secret agreements. Then, in 1998, a French whistle-blower told U.S. authorities about the secret deal. In early 1999, the California Insurance Dept. sued Crédit Lyonnais, alleging fraud and seeking restitution of up to $2 billion in alleged profits. The Justice Dept. and Fed probes followed.

DAMAGE CONTROL. Bank sources say Peyrelevade wants to resolve the Justice Dept. matter, possibly by admitting that Altus technically hid control of Aurora in an agreement that would let the bank avoid criminal charges. Peyrelevade's other imperative is to clear his own image. His office got a fax explaining the Executive Life deal days after he arrived at the bank, according to documents that the bank says it gave to the Justice Dept. But bank officials say Peyrelevade never signed the fax, meaning he didn't read it. He says he only learned of the front operation on Dec. 31, 1998, and told the Fed then.

Crédit Lyonnais' foes claim victory is close. "About the only thing left to do is measure up Peyrelevade for an orange [prison] jumpsuit," quips Gary L. Fontana, a partner at San Francisco law firm Thelen Reid & Priest LLP who now represents the California Insurance Dept.

Other lawyers insist Peyrelevade runs no such risk. If he gets out of this bind, history may remember him as the man who saved Crédit Lyonnais. This saga isn't over, though.

By John Rossant in Paris

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