Dan Walters

Dan Walters: State has done two big deals with Leon Black, and both resulted in scandal

Published: Tuesday, Jul. 15, 2014 - 8:17 pm

Two state agencies have done multibillion-dollar deals with high-flying investment banker Leon Black, and both have resulted in scandals, two decades apart.

Black was a top aide to junk bond king Michael Milken in floating billions of dollars of high-interest corporate debt during the 1980s, but survived the legal bloodbath that sent Milken to prison.

After Milken’s 1989 downfall, Black struck out on his own, and soon signed up some French investors seeking to purchase a multibillion-dollar portfolio of junk bonds held by Executive Life Insurance that Black had helped assemble.

In 1991, just weeks after becoming California’s first elected insurance commissioner, John Garamendi seized Executive Life, contending that its junk bond portfolio was too risky to support payments to more than 300,000 retirees and annuitants.

A few months later, Garamendi sold the junk bonds to Black’s clients for $3.25 billion, but they turned out to be worth billions more – netting Black somewhere between $500 million and $1 billion – and his clients turned out to be fronts for Credit Lyonnais, a bank controlled by the French government and therefore barred by federal law from owning a U.S. insurer.

Garamendi faced sharp criticism in the financial media and from policyholders whose checks were reduced. “Smart buyer, dumb seller,” was the headline in an extensive Forbes magazine critique, concluding that Black had exploited Garamendi’s desire for a big political splash.

Decades of lawsuits, trials, diplomatic maneuvering and other fallout ensued. The state Department of Insurance is still appealing one case. Garamendi later served another stint as insurance commissioner and was elected lieutenant governor before going to Congress.

Black used his Executive Life profits to build Apollo Global Management into a huge private equity operation that today owns, among other things, the Caesars casino empire, Norwegian Cruise Lines and the Carl’s Jr. fast food chain.

By and by, Apollo sought investment capital from the California Public Employees’ Retirement System’s immense trust fund, which was turning to private equity deals to meet ambitious earnings goals.

Apollo, whose motto is “seeking to invest with an edge,” retained Alfred Villalobos, a former CalPERS board member, as a “placement agent.”

Villalobos obtained key documents from Fred Buenrostro, CalPERS’ top executive at the time, to qualify Apollo, and eventually it did $3 billion in deals with CalPERS, which even bought part ownership of the firm.

Buenrostro has pleaded guilty to accepting bribes and agreed to help the prosecution of Villalobos, who was fired by Apollo.

Two big deals and two big scandals. Leon Black claimed ignorance of shady dealing in both, but maybe it’s time for officials to stop doing business with him.


Call The Bee’s Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters. Follow him on Twitter @WaltersBee.

Read more articles by Dan Walters



Dan Walters, political columnist

Dan Walters

Dan Walters has been a journalist for more than a half-century, spending all but a few of those years working for California newspapers. At one point in his career, at age 22, he was the nation's youngest daily newspaper editor.

He joined The Sacramento Union's Capitol bureau in 1975, just as Jerry Brown began his first governorship, and later became the Union's Capitol bureau chief. In 1981, Walters began writing the state's only daily newspaper column devoted to California political, economic and social events and, in 1984, he and the column moved to The Sacramento Bee. He has written more than 7,500 columns about California and its politics and his column now appears in dozens of California newspapers.

Email: dwalters@sacbee.com
Phone: 916-321-1195
Twitter: @WaltersBee

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