Commentary: The Gaijin Aren't At Fault Here

Ripplewood stands to make a bundle on the Shinsei IPO. What's wrong with that?

The $2.1 billion initial public offering of a once-zombie bank should be a moment of triumph for Japan. It marks the close of one of the darkest chapters in the country's economic history: The 1998 collapse and nationalization of fabled industrial lender Long-Term Credit Bank of Japan. Now renamed Shinsei Bank and sold by the government for a song to a group of U.S. and European investors, it has one of the strongest balance sheets among Japan's megabanks. It's expected to earn $600 million this year. And the Feb. 19 sale of 35% of its voting shares is Tokyo's biggest IPO in four years. The deal is proof that Japan's banks can be saved, and by extension that Japan can change -- with help from its Western friends.

Well, maybe. The deal also reveals just how far Japan has to go in its whole attitude toward free markets. Shinsei has turned into more than just a bank deal. It's also a touchstone in the still-fierce debate inside Japan about how to deal with outsiders, especially those who -- like the bank's gaijin saviors, U.S. workout group Ripplewood Holdings -- are intent on changing the system and making gobs of money while they do it. Newspapers, members of the Japanese Diet, and even industry bigwigs are all saying the country got a raw deal in the Shinsei cleanup. None other than Hiroshi Okuda, Japan Business Federation chief and chairman of Toyota Motor Corp., wondered aloud on Feb. 9 if it might have been better had LTCB never been sold to the foreigners. Some politicians even made a last-ditch attempt to delay the offering.

Ripplewood and company are making no bones about the fat profit they're getting. The IPO values the bank at more than $6 billion -- a huge gain on the $1.15 billion Ripplewood and its backers put into a moribund LTCB. But what especially galls many Japanese is that the government -- and hence taxpayers -- spent some $76 billion on capital injections and the assumption of dud loans from the bank both before and after the sale to the gaijin. After? It turns out that Timothy C. Collins, Ripplewood's boss, cleverly extracted a put option that allowed Shinsei to hand over to the government any problem loans lurking on the books. And problem loans did pop up -- especially those to Sogo, a giant retailer, which came close to collapse in 2000. Now many Japanese are grousing that the gaijin played the government for suckers, extracting a sweetheart deal that the mandarins of the Financial Service Agency had no right to give.

Japan should consider its own missteps, though. For starters, the gaijin aren't the villains. The real bad actors in this drama are the bank regulators who for years failed to detect book-doctoring and outright lies and corruption by the bankers running LTCB. Had feckless regulators done their jobs in, say, 1993 or 1994, the bank could have been saved, merged, or sold off without costing taxpayers anywhere near as much.

The Japanese also virtually guaranteed that the Shinsei deal would be politicized by agreeing to the loan guarantees. If regulators had identified all of LTCB's bad loans right from the start, they could have negotiated a fair price for the bank -- with Ripplewood shouldering all of the risk in return for the potential rewards, plus the right to deal with troubled borrowers as it saw fit. Instead, when Ripplewood discovered bad loans post-sale and demanded the government take them on, there was an uproar: The Diet even grilled Shinsei chief Masamoto Yashiro when he refused to bail out Sogo.

The Japanese should also come clean about what's really bothering them. Ripplewood's profits have certainly upset many. But more disturbing is that the gaijin exposed Japan Inc.'s propensity for hiding unpleasant truths. By repeatedly and publicly uncovering more bad loans hidden away in Shinsei, the bank's foreign owners showed how rotten Japan's financial edifice really was. The gaijin not only outwitted the Japanese: They humiliated them.

The uproar over Shinsei may yet die down. The government, after all, owns a chunk of Shinsei preferred stock and could recoup billions later this decade. That should remove some of the sting. But the Japanese should stay focused on the real payoff. The workout inspired other foreigners to invest in the likes of Aozora Bank and Tokyo Star Bank Ltd., and pressured other Japanese banks to restructure even further. Sure, it's no fun to see an outsider walk away with a pile of your cash. But if insiders won't take the risk, then the rewards should go to those who will. If they succeed, Japan will eventually be a winner.

By Brian Bremner

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