Feb. 19 (Bloomberg) -- Billionaire J. Christopher Flowers says Shinsei Bank Ltd., the Japanese lender he partly owns, over-reached with investments in the U.S. and Europe that turned sour.

“In retrospect, the overseas investments were too large,” Flowers, who is the bank’s largest private shareholder, said in a telephone interview. “But they didn’t seem too unusual at the time.”

Shinsei, the first Japanese bank taken over by foreign investors, has booked more than $1 billion in losses and charges on toxic assets including loans to failed Lehman Brothers Holdings Inc. and an investment it made through J.C. Flowers & Co. in Germany’s Hypo Real Estate Holding AG.

Japan’s taxpayers were “taken to the cleaners” after the government spent 7.9 trillion yen rescuing the lender, says Kenichi Ohmae, a former chairman of consulting firm McKinsey & Co. in Japan. Flowers and other investors reaped at least a fourfold profit by raising 555 billion yen ($6.1 billion) in two share sales after they bought the failed Long-Term Credit Bank of Japan Ltd. from the government in 2000 for 121 billion yen.

“These people weren’t interested in managing a bank,” said Ohmae. “They were interested in making money.”

Flowers, a former Goldman Sachs Group Inc. partner, said Shinsei had been involved in “lots” of deals with his fund during his nine years as a leading private shareholder.

“The overall record is a very profitable one for Shinsei and for us,” he said, without giving details. “Why people still talk about us chasing short-term gains is a mystery to me.”

Toxic Investments

Flowers and New York-based Cerberus Capital Management LP are being criticized in Japan for losses on toxic investments overseas. Aozora Bank Ltd., controlled by Cerberus, last week forecast a 196 billion yen loss this financial year after losses on subprime mortgages, GMAC LLC shares and Bernard Madoff’s fund.

Buyout funds globally are struggling to contain losses on investments in companies from Germany to the U.S. as the global recession slashes earnings.

Masamoto Yashiro, 80, Shinsei’s former chief executive officer recalled to helm the bank in November, says the lender had poor risk management, staked too much for its size and missed signs of Lehman’s coming collapse.

The bank’s Tier 1 capital ratio, a key indicator of financial strength, is the lowest of eight nationwide lenders at 6.64 percent at the end of last year, according to Bloomberg data.

Cleaning Up ‘Mess’

“I’m trying to clean up all these messes,” Yashiro, who has forecast a 48 billion yen annual loss in the year through March, said in a December interview. “The bank was interested in improving its earnings by a substantially higher percentage than was possible.”

Yashiro replaced Thierry Porte, who stepped down to take responsibility for the losses. The bank’s shares have fallen 77 percent in the past year, the most among 84 lenders in the Topix Banks Index.

The loss will be the second in three years for the lender, formerly the Long-Term Credit Bank which was nationalized in 1998 after collapsing under bad debts.

Investors led by Flowers and Ripplewood Holdings LLC founder Timothy Collins renamed it Shinsei, Japanese for new life, after the takeover. Ripplewood is no longer a major shareholder, according to Bloomberg data.

Lehman Loans

Investors raised 250 billion yen in an initial public offering in 2004 and a further 305 billion yen with a share sale the following year.

Shinsei racked up profits in its first six years under foreign ownership. The bank gave funds to J.C. Flowers to invest and had no discretion where Flowers placed the money, Flowers said. Neither Shinsei nor Flowers would give the amount.

One of those deals was Flowers’ purchase of 24.9 percent of Hypo Real Estate for about 1.13 billion euros ($1.46 billion) in June 2008. The German property lender has received 102 billion euros ($132 billion) in public funds as German Chancellor Angela Merkel tries to prevent it from collapse.

Shinsei lost 29 billion yen on loans, bonds and trading with bankrupt Lehman, the most of any Japanese lender, in the nine months ended Dec. 31, according to figures released by the company.

“Everybody had known Lehman Brothers had some problems,” Yashiro said. “The risk management was at fault and top management too.”

Ratings Cut

Flowers sits on Shinsei’s board and recuses himself from votes that involve his funds, Flowers said.

“Shinsei didn’t have the know-how or the people to make these investments overseas,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $3.1 billion.

Fitch Ratings on Feb. 6 warned it may cut Shinsei’s credit ratings to the second-lowest investment grade, citing “the weakening of Shinsei’s capital ratios.”

Yashiro said in December he’s working to raise additional capital by the end of March.

The bank will focus on retail and consumer finance in Japan, as well as commercial banking niches, Flowers said.

“I think that it can go forward and prosper,” he said.

Ohmae said the government should apologize to taxpayers for selling Shinsei to private equity funds that invested in risky assets.

“This is a disaster in oversight,” he said.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.netTakako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

Last Updated: February 18, 2009 13:01 EST