SAVING THE SUN
A Wall Street Gamble to Rescue Japan from Its Trillion-Dollar Meltdown
By Gillian Tett HarperBusiness -- 337pp -- $26.95
The spectacular 1998 downfall of Long Term Credit Bank of Japan Ltd. (LTCB) was a seminal event for modern-day Japanese capitalism. The Tokyo megabank lent money recklessly, engaged in a criminal cover-up, and then saw lies aplenty unravel under outside scrutiny. But that's far from the whole story. The crash revealed to the world the rot beneath Japan's bank-centric financial system, under which bankers and financial bureaucrats portioned out capital foolishly and almost never allowed overextended borrowers to fail. The practices exacted a serious toll in lost Japanese economic growth.
Now comes a smart and engaging rendering of LTCB's collapse and its messy takeover by a consortium of Western investors. Saving the Sun: A Wall Street Gamble to Rescue Japan from Its Trillion-Dollar Meltdown, by former Financial Times Tokyo bureau chief Gillian Tett isn't breakthrough reporting. But it's a riveting tale with important insights into Japan's culture and its sclerotic system.
LTCB started operations in 1953. There had been a brief attempt by U.S. occupation authorities to open up Japan's capital markets. Tokyo officialdom, though, preferred that banks be the primary channel for funneling money to industry. Specialized lenders such as LTCB were to give preferential treatment to such industries as shipping and textiles, key to economic recovery and the cultivation of overseas markets. Stocks were viewed not as investment instruments but as a way of cementing ties among big companies and banks.
During Japan's high-growth years of the 1960s and '70s, the system seemed to work brilliantly. By the late '80s, Japanese companies backed by friendly banks scared the daylights out of foreign competitors. A stock market bubble also enhanced Japanese investors' ability to buy foreign companies and real estate. The market capitalizations of Japanese banks dwarfed those of New York and London institutions. By 1989, Tett notes, LTCB's market cap was several times Citibank's, and its assets were the ninth-largest in the world.
It all ended badly. The Nikkei peaked in December of that year and crashed in 1990, setting off a bear market that lingers to this day. Next, real estate prices collapsed, savaging just about every loan book in Tokyo and Osaka. LTCB proved no exception. One of its biggest borrowers was Harunori Takahashi, a flashy real estate speculator known for making extravagant bets on resorts and golf courses across Asia. Although Takahashi had for years seemed untouchable, LTCB was forced to cut its ties with him in the mid-1990s, after his company's illegal business practices -- and his habit of treating financial regulators to expensive sex-club outings -- came to light. But by then, Takahashi had nearly $2 billion in outstanding loans from LTCB, half of which went bad.
There were other disasters lurking: LTCB was carrying $50 billion in dud loans, had no viable business model, and was too damaged to attract foreign partners with capital and managerial expertise. When Katsunobu Onogi took over as president in 1995, LTCB was in a death spiral. Tett provides an excellent description of LTCB's woes and the loan-book doctoring that eventually led to criminal convictions for Onogi and other executives.
The second half of Saving the Sun chronicles the effort of Wall Street money pros, led by New York private-equity firm Ripplewood Holdings LLC, to buy and revive LTCB, which had been declared insolvent and taken over by the government. Ripplewood founder Timothy C. Collins pulled every string he could, knowing that the Japanese would view a foreign takeover of LTCB with grave suspicion. He recruited such figures as former Fed Chairman Paul A. Volcker and ex-Chase Manhattan Bank Chairman David Rockefeller to lobby Japanese officials. A Democratic Party donor, Collins even got pal Bill Clinton to seat him close to Japanese Prime Minister Keizo Obuchi at a White House state dinner, says Tett. Meanwhile, Collins' allies in Japanese business, such as Mitsubishi Corp. Chairman Minoru Makihara, advised against the takeover.
Ripplewood eventually prevailed, recruiting the highly regarded former head of Citibank Japan, Masamoto Yashiro, to run a revamped LTCB. It would later be dubbed Shinsei, or rebirth. But the structure of the government's sale of LTCB guaranteed acrimony. Ripplewood and its backers, which included GE Capital and Mellon Bank, agreed to buy LTCB for about $1.2 billion. The government assumed $50 billion in nonperforming loans, leaving the bank with $110 billion or so in supposedly healthy assets. If, during the three years following the bank's purchase, any remaining loans lost more than 20% of their value, Collins insisted that the government must buy them, too.
Once Shinsei was up and running in 2000, Yashiro became aware of further problems. For example, giant retailer Sogo Co., which had $19 billion in total debt, wanted half of the $1.7 billion it owed Shinsei forgiven. While such bailouts are common in Japan, the action would have wiped out Shinsei's capital base and profits. Yashiro said no, and Sogo went under, touching off a firestorm in the Japanese Diet.
The idea that borrowers should suffer when they can't repay loans still shocks Japanese. Shinsei and other foreign-owned banks, however, are starting to change that. Today, Shinsei, which has branched out into retail and investment banking, is profitable and has a promising future. But as Tett shows, the East-West cultural divide still yawns wide.
By Brian Bremner