SAVING THE SUN: Shinsei and the battle for Japan’s future by Gillian Tett
Listener: 27 March, 2004.

Keywords: Business & Finance;

One day in 1999, banker Takashi Uehara checked into a suburban hotel in 1999 and then hanged himself. His suicide note read, “I am so sorry.” It was a traditional hara-kiri, except that ritual disembowelment –– slashing one’s stomach open with four precise strokes of the sword –– was considered too selfish and messy, whereas the anonymous event in the hotel spared his family the shock. To this mixture of Japanese and Western values was added those of the finance sector, for the shame Uehara wished to expunge was that his bank was going bankrupt.

Not that the suicide saved Long Term Capital Bank (LTCB), for the problems it faced were endemic in the Japanese economy and, perhaps, the Japanese psyche, the issue explored in the eminently readable Saving the Sun, by financial journalist Gillian Tett.

By the late 1980s the Japanese economy, having caught up with the West, began stagnating, as businesses located to the cheaper Asian tigers to the south. Ironically, the economy that achieved so much by adopting and organising Western technology could not adapt to the new economic circumstances. The expansion had been financed by supportive banks with long-term commitments to their customers, financed on the value of the assets rather than the cash flow it would generate in the immediate future.

As long as the economy rapidly expanded, the financing strategy worked. As manufacturing opportunities ran out in the late 1980s, the banks turned to real estate. So when LTCB was approached by a Japanese property company, EIE International, to finance building the Four Seasons luxury hotel in Central Manhattan, they went ahead. The cashflow analysis suggested the maximum viable investment on the site was $US150m (an analysis which was to prove correct when, later, the built hotel was sold for that price). The planned cost turned into $US600m after overruns. LTCB ended up with a huge debt that had no cash flow to service it.

That debt should have been put in the books as a “non-performing loan”. All financial institution banks have some –– advancing money is a risky business. A well-organised bank has a good record of those bad debts. LTCB, and apparently most Japanese banks, had barely any idea, despite their reckless lending making them awash with loans that could not be paid off.

When EIE International fell over (the Australian newspaper head-line was “EIEI O”), LTCB was also bankrupted, then nationalised, and subsequently sold to an American consortium, to be reborn as Shinsei (“new life”). And yet the new bank faced the same difficulties as the old one. The Japanese were reluctant to deal with the non-performing loans, for it represented a breakdown of the commercial-personal relationships on which their past success had been founded –– a loss of face.

However, someone has to bear the losses, currently thought to be between $US200b and $US700b across all Japanese banks –– equivalent of four to 12 years of New Zealand GDP. Shareholders are the first losers, but those with deposits in the institution may find their savings devalued. (This happened with some New Zealand institutions –– such as the DFC –– in the 1980s, although hardly on the same scale.) Depositors want the bad debts taken over by the government, but that only shifts the burden onto the taxpayer. Dithering leads to a pass-the-parcel (bomb), dragging the financial system, and the economy, down, for the ambiguity means no one knows whether any financial institution is solvent. Who wants to deposit in or borrow from ambiguously bankrupt banks?

As no Japanese institution wanted to take over a bankrupt bank, Americans bought LTCB, leaving many of the non-performing loans with the government as a part of the purchase deal. The culture clash between American and Japanese approaches was extreme. (Further complicated by the new owners hiring vegetarian Indian computer experts, who ignored traditional relationships with Fujitsu and bought American computers.) Tett writes, “Wall Street was founded on the presumption that if there was a showdown between a legal transaction and a [business] relationship, it was the transaction and not the relationship that will be honoured.”

I leave her to tell the rest of the enthralling story. For although it is a business yarn, albeit one entwined by some grubby US and Japanese politics, it is also a story about the twain of East and West meeting –– and not meeting. The reader is likely to be left deeply perplexed about the merits of their respective approaches. It is easy to value relationships above those of financial contracts, but the book nicely illustrates how the former creates ambiguities, puts off hard decisions, and leaves a greater mess to future generations.