Executive Life Insurance Co.'s tumbling dominoes have threaded their way through insurance regulators, investment bankers, state legislators, employee retirement plans, institutional bond buyers, the Internal Revenue Service, and now the Securities and Exchange Commission, according to Rep. John D. Dingell, chairman of the House Energy and Commerce Committee.

Mr. Dingell sent a letter dated June 4 to Richard Breeden, chairman man of the SEC, asking for a full report of "your investigation into the circumstances surrounding certain municipal bonds backed by guaranteed investment contracts." The SEC had no official response.

At the end of the line stands the bondholder, whose taxable municipal investment is on the brink of worthlessness. And the man who controls the fate of the bonds -- California Insurance Commissioner John Garamendi -- has little or no sympathy for the investors' plight.

"The municipal GICs are at the bottom of the credit ladder," Mr. Dingell's letter quotes Mr. Garamendi as saying. "How did this happen? Where was the SEC?" Mr. Dingell asked.

Regardless of whether the SEC probe detects salvageable culpability, the Municipal Securities Rule-making Board offered slight hope to bondholders in an aggressive finding against Merrill Lynch, Pierce, Fenner & Smith Inc. Last week, the MSRB revealed an arbitration ruling that concluded Merrill Lynch was at fault for losses incurred after it sold the GIC-backed bonds in 1988 and 1989.

"This opens up the door for investors to recover their losses in another way, not just through the insurance commission," said Jeff Eglow, president of Warren, N.J.- based JLE Asset Management, a pension fund adviser. Now we can go after the salesman. It will probably become a class action suit."

Part of the rationale in awarding about $177,000 in damages to the bond buyer -- a bank in Illinois -- was that Merrill Lynch's confirmations did not identify Executive Life's role in the transactions or the existence of the GICs. The claimant bank said the confirmations "make it appear that these were typical housing finance agency type bonds," and the MSRB agreed, saying Merrill Lynch is "directly responsible" under Section 20 of the Exchange Act.

"Talk about a can of worms," said one trader who handles the bonds. "Those confirmations are a mess on the best of days," he said, referring to notices of municipal sales sent to individual investors.

Mr. Eglow said confirmations are more troublesome with municipal trades than other securities because space constraints render accurate portrayal of the purchase almost impossible. "It can't reflect the actual wording on the prospectus," he said. "There's just enough space to process the ticket, and perhaps to say they were triple-A housing bonds at a certain percentage over Treasuries."

Within California, local politicians are trying to cajole Mr. Garamendi into giving priority treatment to the three GIC-backed deals done in 1989 by state issuers. State Senator Marian Bergeson, R-Santa Barbara, met Thursday with the commissioner to see if Simi Valley, the city of Whittier, and Temecula Valley Unified School District could be treated better than the taxable municipal deals of 1986. Her constituency includes Temecula Valley.

Ms. Bergeson was not available for comment late Friday, although sources close to the meeting said Commissioner Garamendi offered plenty of advice, yet no concrete concessions. Mr. Garamendi was reported to have told Ms. Bergeson that a rationale for distinguishing the 1989 deals from the 1986 could be that speculators now hold the 1986 bonds.

Traders acknowledge that all of the recent 1986 bond buying -- at levels ranging from 24 to 27 cents on the dollar -- is by speculators that hope to settle with the commission for 40 to 50 cents.

In fact, there are several aspects of the 1989 contracts that are more "legitimate" than the 1986 deals, according to Dean Misczynski, consultant for California State Senate's office of research. He said a drawdown scheduled would have allowed Temecula Valley, for example, to get about half of its $24 million out of the GIC by the end of 1992 and the balance by 1995, while the taxable deals were sewn tight.

Also, $4.5 million of the GIC already has been drawn down, the clubhouse for the project's golf course is built, and 10 of the homes for senior citizens have been completed, according to sources in the district.

A twist in the California GIC chapter of the story is the availability of downgrade clauses. According to Los Angeles-area GIC brokers, financial advisers for many deals done since late 1988 obtained language in Executive Life GICs that allowed the issuer to escape the contracts if the claims-paying rating dropped. Although only three deals apparently remain in the state, as many as eight may have been dissolved thanks to the clauses, estimated one source.

Santa Ana Community Redevelopment Authority, for example, was able to back out of a $109 million GIC -- after much legal wrangling -- because its advisers were savvy enough to demand the language. Standard & Poor's Corp. rated Executive Life AAA until January 1990.

But underwriters of the 1986 bonds would have none of this separation of contracts. In a brief filed in the County of Los Angeles Superior Court, six senior managers and co-managers of those issues argued that all GICs are obligations of the insurance company and should be treated equally, including the pension contracts that Mr. Garamendi would give priority to over the bonds.

The 1986 bonds, two of which are in default because Mr. Garamendi ceased all payments as of April, include: a $400 million Memphis Health, Education & Housing Facility Board offering; a $300 million multifamily housing issue sold by the Adams County, Col., Industrial Development Authority; a $300 million Southeast Texas Housing Finance Corp. issue; a $200 million El Paso Housing Finance Corp. issue; two $150 million Louisiana Agricultural Finance Authority offerings; a $150 million Louisiana Housing Finance Authority issue; and two Nebraska Investment Finance Authority deals, each $100 million.

Apart from the California deals, there are four outstanding tax-exempt issues with Executive Life GICs on record: two 1989 St. Paul, Minn., Housing and Redevelopment Authority multifamily housing revenue bonds insured by the Federal Housing Administration, together totaling $11.28 million; a 1989 $7.63 million Tucson, Ariz., multifamily housing, variable-rate issue, also insured by the FHA; and a 1985 $11.9 million Eureka, Mo., issue, which is insured by Municipal Bond Investors Assurance Corp.

More GIC-backed issues may exist, but requests for lists of the outstanding municipal GICs to the California Insurance Commission have as yet been ignored.

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