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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Yorikke who wrote (5450)	1/22/2002 10:47:38 AM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 33421

Hi Yorikke, Some interesting points. I'm a big believer in cultural differences and the impacts they can have on economic performance. As important as the issue of cultural differences are, the Japanese network of interlocking relationships and affinity practices were not what brought the Japanese banking system into its current state. The problems begin with the Japanese regulatory environment. The regulatory issues start with the capitalization of banks and return requirements. In the 80s, in response to the global banking problems related to third world debt issues, the BIS led a global effort to create uniform bank regulatory standards. The Japanese banks were operating under the narrowest capitalization requirements of all the major economies. In addition there were issues regarding what qualified as capital. Unrealized gains on equity holdings were among the items that were allowed to qualify. In an up market this fueled a ballooning of bank balance sheets. In a down market and with the imposition of global standards this caused a large percentage of capital to evaporate and damaged the system. Return targets were another issue. When I met John Pitera we were both working for a large US bank. There was a saying around the bank was that the quickest way to get fired was to do a $10 billion 10 year transaction with locked in funding and zero credit risk for a return of 10 basis point. The reason being that despite the guaranteed profits the thinness of the return would never pass Fed requirements and the size of the deal would cripple the bank for years. Unfortunately the BoJ was not applying similar standards and the Japanese banks got in trouble because of it. In response to the capitalization problems addressed above the Japanese banks developed an aggressive appetite for high credit quality floating rate assets that they could match fund. The idea being that a 10 basis point return might be marginal but that a AAA piece of short term paper would require minimal capital and ANY profit, no matter how thin, would help restore the balance sheets. As they pursued this policy they started trying to lock up libor plus assets for longer periods. This made them a major player in the Floating Rate Note market where they could get high quality assets for 3-5 years but floating on a monthly or quarterly basis. They funded these portfolios with short term interbank deposits that would matching the floating rate risk. The problem came as the Japanese bank's credit ratings continued to deteriorate. In the mid 90s we saw the birth of the Japan premium. In order to attract interbank deposits they now had to pay a premium, at some times as much as a couple of hundred basis points over the index. They had tens of billions of securities with multiple years of remaining life that they were now funding at a significant loss. These assets had nothing to do with affinity relationships but were merely the outgrowth of regulatory practices, and sotto voce encouragement, on the part of the BoJ. The mid to late 90s saw repeated fire sales as the Japanese banks were forced to divest these assets at deep discounts. In my original post when I said the Japanese banks played follow the leader with the government it was this type of regulatory practice I was referring to. Japanese industry has similar issues and the accounting for pensions is a ticking time bomb. Platitudes from government and industry about cultural uniqueness and a matter of honor are little more than hot air and cover the simple fact of bad business practices. It has nothing to do with not mastering any western concept of power. The west had nothing to do with creating these problems, bad business practices did. I find your last paragraph offensive and assume it was just pique at what you considered an insult to the Japanese.