The Sword over Lyonnais

Can the French state rescue the bank?

When it comes to the hot seats of European finance, the hottest has to be Jean Peyrelevade's. The embattled chairman of France's Crédit Lyonnais is fighting for his bank's very independence: The expiration in early July of a pact among core shareholders leaves the Paris institution and its $162 billion in deposits vulnerable to a takeover.

Peyrelevade is also fighting for his reputation. For all his efforts to help Crédit Lyonnais recover from its history of mismanagement, the bank is at the epicenter of a scandal that won't go away, the legacy of a fateful purchase of California's failed Executive Life Insurance Co. in the early 1990s. Claiming Crédit Lyonnais fraudulently gained control of Executive Life, California and the state's powerful Insurance Dept. have launched a civil suit against 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 U.S. Federal Reserve could also levy fines or even lift Crédit Lyonnais' U.S. banking license.

Given these enormous pressures, Peyrelevade--whom the bank says isn't at risk personally of an indictment--must feel sometimes that his job is a poisoned chalice. Reclining on a beige silk sofa in his cavernous Paris office, he seems cool and calm in an interview. The pressure from 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 that `independent' is not a word I'd use in the long term for Crédit Lyonnais," he says. "But why rush into negotiations now when our results and our market capitalization will be increasing over the next two to three years? We're not going to be hurried into a deal. We're going to choose it freely."

HIGH GEAR. One reason for Peyrelevade's calm may be a newly vigorous legal strategy to resolve the Executive Life affair, which has hung over the bank since 1999. Crédit Lyonnais insiders say they believe all-out efforts to avoid a federal criminal indictment will bear fruit. A favorable Justice Dept. ruling would undercut the California suits, say lawyers on both sides.

A new factor could tip events in Crédit Lyonnais' favor--the power of the French government, which is finally throwing its diplomatic and legal weight behind the bank that it rescued at huge cost in 1994 and 1995. "It was only at the beginning of this year that the French government finally woke up and started doing something," says a French lawyer working on the case.

Paris has moved into high gear. On June 26, lawyers representing France, Crédit Lyonnais, and the Consortium de Réalisation, the entity into which Crédit Lyonnais' troubled assets were placed six years ago, met with Federal Reserve officials in Washington. Two weeks earlier, French Foreign Minister Hubert Vedrine discussed the case with Secretary of State Colin L. Powell. French government sources say President Jacques Chirac and Prime Minister Lionel Jospin plan to raise the matter with the White House. Top Lyonnais officials don't expect Justice to act until September.

The issues go back to 1991, when the California Insurance Dept. seized Executive Life after its junk-bond portfolio, once worth $9 billion, collapsed in value. The state accepted an offer from Altus Finance, then a Crédit Lyonnais unit known for high-risk investments, to buy the junk bonds for $3.25 billion. A new, ostensibly independent insurer, Aurora National Life Assurance Co., owned by a French consortium, would buy Executive Life's insurance portfolios, since at that time banks couldn't own insurers under the now-repealed Glass-Steagall Act. In reality, Lyonnais controlled Aurora through secret agreements, according to documents filed in the case.

This would all be water under the bridge had not an anonymous French whistle-blower disclosed the secret accords to U.S. authorities in 1998. In early 1999, the California Insurance Dept. sued Crédit Lyonnais and other French entities in civil court, alleging fraud and seeking restitution of up to $2 billion in profits that it claims the French reaped from Executive Life. Soon after, the Justice Dept. and the Fed opened their probes.

Crédit Lyonnais has to put the Executive Life scandal behind it. According to bank sources, Peyrelevade would like to resolve the Justice Dept. matter, possibly by an admission that Altus technically concealed control of Aurora. A Crédit Lyonnais spokesman says that the bank will argue that Altus was a rogue unit and besides, state regulators knew of the arrangement. Several sources involved in the negotiations say Lyonnais and the French government are trying to cut a deal with the Justice Dept. that would avoid criminal charges, even if the bank has to pay a multimillion-dollar fine.

WHAT SMELL? Peyrelevade's other imperative is to recover his own reputation. Although the Executive Life deal preceded him, the cases have raised the question: What did he know, and when did he know it? Peyrevelade's office received a 17-page internal fax explaining the contorted 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 insist that Peyrelevade never signed the fax, meaning he didn't read it. He first heard about the Aurora front operation at an executive committee meeting on Dec. 31, 1998--and informed the Fed 72 hours later, they say.

Peyrelevade's longtime associates say there were far more pressing issues. "I didn't smell scandal at Executive Life," says a former bank executive who worked closely with Peyrelevade in 1993. "I didn't have the time. Crédit Lyonnais was on the verge of bankruptcy, and we had to find billions to prop up the bank. [Peyrelevade] is totally irreproachable in this story."

Crédit Lyonnais' adversaries, however, claim they can taste victory. "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. Fontana brought the whistle-blower to officials' attention and now represents the California Insurance Dept.

Other lawyers insist that Peyrelevade runs no such risk. If friends in high places can extract him from this predicament, history may remember him mostly as the man who brought Crédit Lyonnais' back from near-oblivion. That's far from certain, though. This saga isn't over.

By John Rossant in Paris

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