Can't decide whether this article is more reminiscent of Michael Milken or Oliver Stone. Whichever, looks like the Japanese version of the US S&L scam.
The Weekly Post - July 31 - Aug 6, 2000
Inside News From Japan:
The Weekly Post Special :
Sogo Department Store Bankruptcy Reveals Conspiracy and Highlights Japan's Illusive Financial Recovery
1. $200 Million Sweet Loan
In 1995, Sogo Department Store, one of the major department store chains in Japan, decided to open a new store in downtown Tokyo called Kinshi-cho. The then main financial bank for Sogo, Industrial Bank of Japan (IBJ), and their second bank, the insolvent Long Term Credit Bank of Japan (LTCB) loaned $110 million and $90 million respectively to Sogo.
The then Chairman of Sogo, Hiroo Mizushima, said, 'The collateral for the loans is myself.' This episode was well-known throughout Japan's financial world at that time. If Japan's economy and Sogo's business continued to grow, the loan decision made by the two banks would have been deemed a good one and Mr. Mizushima's words would have been admired.
However, things did not work out. The decision by the banks to make $200 million in loans proved to be reckless as was the decision by Sogo's Chairman regarding expansion of the new store in Kinshi-cho.
The question is, how was this irresponsible decision made? One reason is clear. IBJ, which had been proud of itself as being superior to other banks in Japan, did not have the common sense to reject such a plan.
The financial scandal in 1991 proves IBJ's problem. In 1991, Ms. Onoe, the woman owner of a luxurious Japanese restaurant in Osaka, purchased bonds issued by IBJ through their subsidiaries such as IBJ Lease Co. and IBJ Finance Co. Ms. Onoe's method for making money was to obtain loans one after another, putting up bonds as collateral. Eventually, IBJ group companies found that they had loaned her $2.4 billion.
Ms. Onoe's stock investment failed. In order to create additional collateral, she created fake saving certificates. In August 1991, her crime was detected and she was arrested. Her debt was found to have reached $2.85 billion and she had only $118 million in assets. Almost all of the loans from IBJ Group companies to her were defaulted on and they had to be bailed out to the tune of more than $600 million.
It is odd for a major bank such as IBJ to make such huge loans to a private business owner like Ms. Onoe. It was reported in this case that there was a close relationship between Hiroshi Kurosawa, the then IBJ president, and Ms. Onoe.
The incident was taken up at a Diet session and investigated. Mr. Kurosawa was summoned to the witness stand during the Diet hearing but the truth was not fully uncovered. As punishment, IBJ forced Chairman Nakamura and Counselor Ikeura to resign but not Mr. Kurosawa.
In case of Sogo Department Store chain, it was the current president Masao Nishimura who was responsible for having provided the $110 million loan to Sogo. Mr. Nishimura took over for Mr. Kurosawa and has been president for five years. He is also the brother-in-law of the late powerful Liberal Democratic Party (LDP) executive Shintaro Abe.
The reason why Sogo's reckless loan issue is not being questioned in the Diet is the close relationship of President Nishimura with the LDP executives through Mr. Abe.
2. Special Assignment in Charge of Sogo Problem
In 1999, four years after Mr. Nishimura took over the president position, IBJ received a $6 billion loan that was financed by the government to help them bailout bad loans. It is assumed that the $110 million bad loan to Sogo was bailed out using taxpayer money.
However, the issue of using taxpayer money for the bailout of Sogo's bad debts became a political issue. On July 17, IBJ President Nishimura was invited to a hearing held by the Financial Committee of the Lower House. He was questioned about his knowledge of Sogo's financial position. Mr. Nishimura answered the question, "We knew that Sogo was in financial trouble in 1994."
Mr. Nishimura's reply upset the nation. Mr. Nishimura was the Senior Vice President of IBJ and had been assigned to deal with Sogo's financial problem. He had been in a position to fully understand Sogo's situation. The next year, IBJ gave a $110 million loan to Sogo. The decision was made at the executive meeting but Mr. Nishimura as the president of the bank had to be questioned about his responsibility for the loan.
In response to why he made such a loan under the personal guarantee of Sogo Chairman Mizushima, Mr. Nishimura replied, "That was in order to make Mr. Mizushima's responsibility for the case clear."
Professor Hiroshi Kusumoto of Shumei University who was formerly worked for Mitsui Bank said, "A personal guarantee for the bank loan must be attached to assure the repayment of the loan. It cannot be related to the issue of his managerial responsibility."
It was 1993 when Mr. Nishimura was appointed Senior Vice President of IBJ and was placed in charge of reconstructing Sogo financially. His appointment meant that Sogo's financial problems, which included $18.7 billion in debt, was grave enough for IBJ to place Mr. Nishimura who was identified as the future president, on this special assignment.
Mr. Nihshimura sent Mr. Natori, the then IBJ Managing Director to Sogo as its Senior Vice President. The former Long Term Credit Bank of Japan (LTCB) also sent an executive to Sogo as well.
Mr. Nishimura's reply at the Financial Committee hearing was, "In 1994, we already knew that Sogo's debt exceeded its assets," was based on a report by Mr. Natori. His reply clearly suggested that it was impossible for IBJ to make additional loans to Sogo. Now, however, IBJ seems to be attempting to place all responsibility on Mr. Mizushima, the former Sogo Chairman, in order to resolve the situation.
Haraji Oda, the PR chief of IBJ, responded to the TWP question, "Since 1994 when IBJ sent executives to Sogo, it had been under the control of IBJ. However, it was impossible for us to get a full picture of Sogo's financial problems. Former Chairman Mizushima was the only one in a position to have fully known about the problem. All Sogo's branch stores were independent corporations and Mr. Mizushima was the major stockholder of those. All our investigation stopped there,
"When our President Nishimura was a witness at the Diet hearing, he did not know how big the balance of the debt against assets was and how to solve the huge debt situation. We were wondering if Mr. Mizushima was attempting to conceal the real debt."
"It is hard to figure out why IBJ made an additional $200 million loan to Sogo for opening the new store in downtown Tokyo, having known that Sogo had excessive debt. Why?" asked TWP.
"Sogo had had already decided to go for the plan. If Sogo took the plan back, it would have to pay a $125 million penalty to its vendors. IBJ decided to approve the loan after its findings regarding the profit potential of the plan,
"We took the personal guarantee of Mr. Mizushima for the loan and received promissory notes from Sogo's subsidiaries for the debt. Also, we took all of the assets of the new store as collateral. When our loan was made, we had enough collateral to cover the loan. It was not a loan based on the close personal relationship between Mr. Mizushima and our executives."
3. Conspiracy Concealing Financial Problems
There was another reason for IBJ and the former LTCB to conceal Sogo's financial problems.
At that time, Tetsuya Horie, the then President of the former LTCB, was subpoenaed by the Diet as a witness and he faced critical questions about his responsibility for another financial scandal – a huge irresponsible loan made to EIE International Inc. caused by the two credit unions.
When Mr. Horie was subpoenaed, the loans by LTCB and IBJ to Sogo had reached $2 billion and $3 billion respectively. The top management of both banks and Sogo Chairman Mizushima had common interests in concealing Sogo's bad debt.
Executives of both banks who had knowledge of Sogo's financial problem had to make loans for constructing a new Sogo store in downtown Tokyo in order to protect Mr. Mizushima. It was suspected that the loans were made based on personal favors for saving Mr. Mizushima.
A local real estate broker said, proving their scheme; "The value of the new store is no more than $100 million." His words mean that if Sogo sold the store, the two banks would only be able to collect 50 percent of their loans. Since LTCB has gone bankrupt already, the $90 million loan will be recovered by the government, using taxpayer money.
The total credit of IBJ for Sogo is $3.6 billion and half of it -- $1.8 billion – is not backed by collateral. Since Sogo has filed for bankruptcy protection, now, IBJ is forced to bailout the loan. What could have made IBJ bailout such a huge bad loan is the $6 billion taxpayer money injected by the government in order to save IBJ.
It is taxpayer money that has become the collateral for the loans made by IBJ and LTCB to Sogo.
4. Possible Violation of Civil Law
At the Diet hearing, IBJ President Nishimura stressed, "For Mr. Mizushima, one of the choices he can make is to file for personal bankruptcy." He demanded that Mr. Mizushima put up his personal assets.
But, how can Mr. Nishimura take his responsibility as a lender who decided to loan Sogo money despite the fact that he had full knowledge of Sogo's financial problem" Mr. Mizushima's personal assets include his luxury home which is estimated to be worth $7 million and 10,000 shares of Sogo stocks. The Sogo stocks he owns will be worth nothing when Sogo's bankruptcy filing is accepted.
Mr. Mizushima has received $44.5 million in executive compensation from Sogo Group companies over the past 10 years. Also, it is suspected that he has other hidden assets.
Professor Tatsuo Kamimura of Waseda University Law School said, "IBJ loaned money to a person whose ability to repay was in question. It was done without sufficient research. When the loan is defaulted on by the borrower, the executive who made the decision to give the loan can be sued for negligence and will be held liable for the loss under the Japanese civil law Article 644,
"IBJ secured Mr. Mizushima's personal assets when they gave the loan for Sogo's project for the new store. IBJ seemed to have had an intention to pursue Mr. Mizushima's responsibility in case the loan went bad. They would have known that it would happen beforehand. Knowing all these possibilities, if IBJ executives decided to give the loan to Sogo, their conduct may raise legal questions under Article 644."
It seems that the attitude of the IBJ top management is aiming at placing all blame on Mr. Mizushima as a scapegoat in order to avoid their responsibility.
5. Intentional Ignorance of Government Bodies
The Ministry of Finance (MOF) and the Financial Supervisory Agency (FSA) seem to have known the IBJ's problem but ignored it intentionally.
In the evaluation of banks' debts, their loans to a company whose debt is exceeding the asset must be categorized as bad debt and allowance for write-off must be accrued. However, IBJ and LTCB did not classify their loans to Sogo under that category. The reason why they did not do was to avoid the rejection of their loans to Sogo by MOF and FSA since such loans could not be missed by MOF and FSA if they were properly categorized.
The Financial Inspection Unit of MOF and FSA examined IBJ in 1996 and 1998 respectively but two government bodies did not issue any notice for restatement of the debts to IBJ. It was because either IBJ concealed the financial problem of Sogo or MOF and FSA ignored it even if IBJ might have reported the problem to the two government agencies.
IBJ PR office said, "We knew that Sogo's debt exceeded their assets when the MOF audited us, but we did not know the extent of the problem. So, we adopted the method to examine each Sogo Group's company individually and explained it to the MOF."
But, an executive of FSA made a contradictory statement, "Both the MOF and FSA knew that Sogo Group companies were in an excessive debt situation. However, the MOF considered that IBJ could handle $200 million in bad debt and it was not serious for such a large bank as IBJ to bailout in the worst case. The MOF had a favorable view of IBJ because of its involvement in their banking policy and cooperation in their policy-making. Therefore, the MOF could not give strong guidance to IBJ."
The real fact, however, seems to be that IBJ, LTCB, the MOF and the FSA had collaborated for concealing Sogo's bad debts for the last six years since the time when the IBJ President Nishimura had known about the problem. |
