Guess who's coming to dinner? (story on Japan Bank)
By Gillian Tett
Published: September 26 2003 15:08 | Last Updated: September 26 2003 15:08
[re Tony B. I'm downgrading the British Labour party to "vermin" status, and they need to be eradicated at the next election.. pb]
news.ft.com
Next to the hallowed Imperial Palace in central Tokyo there stands a lavish marble and glass skyscraper. Designed more than a decade ago as a symbol of Japan's financial power, it was headquarters of the mighty Long-Term Credit Bank, one of the most powerful in the world.
At the time, the estimated $1bn set aside for the building did not seem extravagant. Japan was enjoying such success that some pundits were saying its economy would soon overtake the US. The Tokyo stock market accounted for more than half the value of all the shares in the world, Japanese investors were snapping up trophy properties across the world, and there were fears that Japanese financiers were about to "buy up" their Wall Street rivals. Japanese politicians felt so confident that they cheerfully lectured America on what it should do to improve its economy, and consumers were so thrilled by their wealth that some restaurants had even started sprinkling gold leaf on plates of sushi.
Just after work began in 1990 on the LTCB headquarters however, Japan's asset bubble burst, ushering in more than a decade of stagnation and three recessions. The stock market is now a quarter of its 1990 peak, land prices in central Tokyo have fallen by 80 per cent, and Japan's once-mighty banks are crippled by a pile of bad loans that some borrowers cannot repay.
There have been some signs recently that the worst may be over, but it is not clear how long this modest upturn will last. In any case, it still seems far too small - and too late - to repair the damage caused by the past 10 years of decline, let alone dispel the sense of self-doubt and disillusionment in the nation.
Perhaps no bank epitomises this rise and fall so well as LTCB. On March 2 2000, an incident took place in that very building that some Japanese might consider a humiliating symbol of their weakness. Three tall Americans walked into the staff canteen on the eighth floor and tried to order lunch.
The Japanese staff could barely believe what they were seeing. Japanese companies have traditionally been homogenous places, and a strict separation is maintained between "insiders" and "outsiders". Visitors are shepherded away from the "private" eating space to special "guest" rooms. Not only were there now foreigners in their midst, but they looked utterly alien. One was Vernon Jordan, who is black and at 6ft 5in tall towered over the Japanese around him. Another was David Fite, an American banker who was equally tall. The third was Tim Collins, the Kentucky-born financier and founder of Ripplewood, a Wall Street buy-out group. "I guess the new invaders have arrived," one of the Japanese bankers thought to himself.
The Americans felt almost as disconcerted. They were there as representatives of a consortium that had just bought the bank. The deal was controversial - nothing like this had been done before in Japan. However, the three men hoped that by popping into the staff canteen they might be able to greet some of the bank's staff. "We wanted to say 'hi' - show we haven't got horns," Collins said later.
As they looked around they saw that in Japan bankers sit in neat, quiet rows, in a clear pattern. At some of the tables there were just women, wearing matching uniforms; at others there were only men in dark blue suits. This was not segregation by sex but by status: the women, so-called "office ladies", all held the lowliest clerical jobs, so they tended to sit together.
"I have seen segregation before," Jordan, a political activist and close friend of former US president Bill Clinton, later recalled. "I'm from the American South - I grew up with segregation. But when I looked at that canteen, it was like a whole new type of divide... it was like nothing I'd seen before."
Jordan looked for somewhere to sit down. He could tell that some form of hierarchy was at work in the room, but it ran against his instincts. He had spent his whole life fighting segregation. "I am a free man! I am a man of the people!" he liked to declare. So he chose the first seat that grabbed his egalitarian fancy - right in the middle of the youngest and most junior office ladies - and with a big grin tried to strike up a conversation with the tiny women around him, using his best American "meet and greet" skills.
The women froze in shock: they would have been scarcely less startled had Godzilla arrived for lunch. Eventually the Americans gave up. But as they quietly ate their lunch, watched by a sea of silent eyes, they discreetly peeped around them and tried to guess what the Japanese were thinking. The most bizarre experiment involving Wall Street and Japan had just got under way.
Japan has had a long love-hate relationship with the outside world. For part of its history, it has been famously isolationist: between the 17th and 19th century, Japan's "shogun" military rulers completely shut its doors to the outside world. To this day the Japanese take pride in being one of the most homogenous large nations on earth, drawing sharp distinctions between Japanese "insiders" and foreign "outsiders" - or gaijin. Alongside this isolationist streak, however, Japan has on occasion brilliantly assimilated foreign ideas, technologies or skills - on its own terms. Its writing system was imported from China. It copied European industrial technology with great skill in the 19th century. It mimicked American manufacturing techniques in the 1960s. And modern Japanese language is studded with words "borrowed" from foreign tongues - albeit so distorted to fit Japanese sensibilities that foreigners can barely understand.
Now, as a new century unfolds, this ambivalence about outside influences has attracted fresh attention. Many Japanese intellectuals say the solution to the decade of political paralysis and drift would be to do what Japan has done in the past: look overseas for ideas that might break the deadlock. One popular model is the "Meiji restoration", the economic and political revolution that took place in the second half of the 19th century under Emperor Meiji. The trigger for that bout of reform came from a most unlikely source: in 1853, American warships forced their way into Japanese waters for the first time, seeking to convert the country to the merits of free markets, Christianity and democracy. The sight of these alien invaders - dubbed the "black ships" - shocked the Japanese elite so deeply that they opened up to the outside world and scrambled to "catch up" with America and Europe, by importing foreign skills, personnel and ideas.
The initiative was brilliantly successful - within a few decades Japan had transformed itself from a feudal agricultural nation into a military and industrial power that was viewed with respect on the world stage and even defeated its mighty neighbour Russia in a naval battle in 1905. After the devastation of the second world war, Japan underwent a similar massive transformation, unleashing a burst of creative energy and rebuilding its economy with impressive speed, partly by imitating American skills.
Can Japan do it again? If the Americans who "invaded" the LTCB canteen back in the spring of 2000 are to be believed, this is precisely what is going on in the bank's gleaming glass and steel Tokyo headquarters. For when this Wall Street consortium acquired the bank, they set in motion not just an intriguing commercial gamble but also a deliberate experiment in cross-cultural rejuvenation. Specifically, the Wall Street bankers have been setting out to import "foreign" ideas into a financial citadel of Japan hitherto discreetly protected from the outside world.
LTCB has traditionally enjoyed a privileged place in the Japanese system. Established in 1953 to provide cheap loans to industry, in line with Japan's efforts to rebuild its post-war economy, it fulfilled this task brilliantly for several decades. But as Japan's economy grew more successful, LTCB lost its raison d'etre: by the 1980s LTCB clients such as Toyota were so cash rich that they no longer needed cheap financing from local banks. So it rushed into real estate lending, and when this bubble collapsed, was left nursing a burden of bad loans to deadbeat companies.
For eight years, the bank's management - like every other financial institution in Japan - kept playing for time by concealing its problems, hoping that the economy would recover and make the problems go away. But the recovery never came, and in 1998 LTCB became the world's biggest bank failure. It had at least $50bn of bad loans on its books - shocking by any measure, but only a small part of the $1,000bn-plus of bad loans recently seen in the Japanese banking system.
The government nationalised the bank and - under US pressure - decided to make a bold gesture of reform. It appointed Goldman Sachs to find a buyer. One enthusiastic bidder emerged: a Wall Street buy-out firm, Ripplewood, headed by Wall Street financier Tim Collins, acting in tandem with Chris Flowers, a former high-flying Goldman Sachs banker.
At first this group seemed to have little chance: it was unknown, and Japan had never let any of its banks fall into foreign hands. Indeed, Goldman Sachs considered Ripplewood such an interloper it was given the codename "Cowboy" in internal documents.
But against the odds, Ripplewood won the day, aided by a combination of deft political lobbying and a star-studded team of American and Japanese advisers and investors. These included Jordan and Paul Volcker, former chairman of the Federal Reserve. The finance came from blue chip investors, including GE Capital, Citigroup, AIG and Mellon, together with Europeans such as Deutsche Bank, UBS Paine Webber and Jacob Rothschild. The final price tag for the bank was $1.2bn. By Japanese standards, that made it a record buy-out deal. But given that the bank had about $100bn in assets, to many Japanese it seemed a snip.
On June 6 2000, the bank officially reopened for business in the old headquarters of LTCB. Masamoto Yashiro, the new chief executive, unveiled a small plaque at the front of the steel and glass tower saying "Shinsei". The bank had chosen this new name because it meant rebirth or - more literally - "new life". Then Yashiro congratulated all the staff in an email. "This is a most exciting moment," Yashiro told local journalists. "We are creating a new type of bank."
In many ways, Yashiro was the perfect person to be heading the experiment: he has spent much of his life trying to bridge the cultural chasm between America and Japan, convinced that a key to reinvigorating Japan is to bring in "foreign" ideas and make them distinctly Japanese, in the spirit of the Meiji restoration. Yashiro was born on February 14 1929 in Tokyo, the youngest of three children. He lost his father, sister and mother during the war and, like many Japanese of his generation, was both scarred by the loss and left financially bereft. "Until four or five years ago I used to have a recurring dream about my mother in which I screamed: 'Mother, don't die'!" he says.
After the war, Yashiro studied law at Kyoto University and paid for his course by working as a telephone-switchboard operator for the occupying US army. Then in 1952 he took part in a US-Japan student peace conference in San Francisco, followed by a United Nations scholarship to travel to Europe. This left him passionately interested in overseas cultures and in 1958 he found a job at the Tokyo office of Standard-Vacuum (Stanvac), an American oil company that later became Exxon. It was a very unusual choice at the time. "[In those days] since most students pursued careers in the civil service or with Japanese firms, anyone who opted to work for a foreign company was assumed to be odd or incompetent," Yashiro later admitted. But Yashiro flourished: he gradually rose inside Exxon's Asian operations, becoming a prominent member of Tokyo's business community - albeit one perceived as a loose cannon, since he worked for an American company.
In 1989, at the age of 60, Yashiro retired from Exxon. However, his generation of wartime survivors had been raised believing it was their duty to work, and he soon accepted a job from John Reed, then head of the American bank Citibank, running the group's retail banking arm in Japan. Yashiro was new to banking and looked up to the American as a teacher. Reed, for his part, was delighted to cultivate Yashiro as a quasi-protege, since it provided him with a loyal guide and "fixer" in the mysterious world of Japanese banks. "Yash and I have become older and wiser together over the years," Reed says. "He is a fascinating character, perhaps one of the few people who can bridge the Japanese and American worlds. But Yash never forgets that he is very Japanese, just as deep down I am American."
Yashiro turned Citibank's loss-making retail operations in Japan into a source of profits for the American bank, and after he retired, Ripplewood was eager to recruit him for the Shinsei bid - not least because he had strong views about what should be done to stem the long decade of rot in Japan's banking world. As far as Yashiro was concerned, this did not mean making Shinsei into a child of Wall Street. "I never felt that I wanted to make this an American bank," Yashiro later explained. "When I arrived I knew that we could not follow an American model, but we could not follow the old Japanese model either. So we had to create something new - a new way of being a Japanese bank. That was my hope."
Under pressure from the American investors to produce quick results, Yashiro immediately flung himself into this reform mission. In the summer of 2000 he summoned the bank's chief financial controller to his office.
"Did we make money last month?" he asked.
"We don't know," the controller replied.
"Why don't you know?"
The controller explained that when the bank was called LTCB it only looked at profit and loss figures every six months. That was usual in Japan: since corporate planning departments drew up business plans on a five-yearly basis, nobody saw the need for the monthly data that American businesses demand.
"Can you give me your best guesstimate?" Yashiro asked. A few days later the controller complied, with a number for profits in April.
"What's the confidence level in this number?" Yashiro asked.
"Maybe 20 per cent, or 30 per cent, up or down," the hapless official replied. Yashiro was appalled. "We have got to know where we are making money!" he bellowed. "What products with which customers, how much and what risk we are incurring!"
A few days after his arrival, Yashiro declared another reform: he was abolishing the traditional uniforms that "office ladies" had always worn - and which had so startled the three Americans back in the spring of 2000. Yashiro wanted to remove the traditional barrier between female "office ladies" and male clerical staff, and allow women to be promoted to management positions on merit for the first time.
Then a diverse group of Americans, Chinese and Koreans were recruited to develop investment banking products and swathes of hierarchy were removed. For the Japanese bankers who had toiled in LTCB for years, it was a big shock. "Frankly, for much of the first year the atmosphere in the bank was like civil war," one later said. "Everyone was fighting everyone else."
Outside the bank, Shinsei was facing even bigger cultural challenges. In the early summer of 2000 a banker came running into Yashiro's office on the 19th floor. "Sogo has just come to us asking for debt forgiveness!" Nervously, the banker explained that Sogo, a prestigious department store, had just asked Shinsei to cancel ¥98bn ($841m) in loans, or about half of the total Y205bn outstanding with the company. "What shall we do?"
Sogo was one of the leading retailers in Japan and in the 1980s borrowed some ¥2,000bn to gobble up trophy properties across the world. A refusal by Shinsei could trigger Sogo's collapse - which in turn could create new losses at other banks that lent to Sogo. In traditional Japanese thinking, that meant Shinsei's refusal would be utterly "selfish". To make matters worse, Sogo employed 10,000 people, and another 40,000 worked in Sogo's suppliers.
However, the debt forgiveness request epitomised everything that Yashiro thought was wrong about Japanese banking. Local bankers had known for years that Sogo was bankrupt. Yet they had kept pouring loans worth billions of yen into the group, hoping that an economic miracle would rescue them from the need for tough decisions. Yashiro refused to roll over the Sogo loan, asking the government to do this instead. "We cannot continue to make loans to companies with a high risk involved," Yashiro explained. "If I carry on doing business in the old way, this bank would go bankrupt again."
Sogo collapsed. The other banks were furious that Shinsei had created losses for them - and doubly angry since Shinsei was protected from the financial fall-out under the terms of its deal with the government, which included a three-year "insurance" clause guaranteeing that if any loan lost more than 20 per cent of its value - as the Sogo loan had - Shinsei could return it to the government for compensation. As the implications of this sunk in, Japanese bankers and politicians rounded on Shinsei and Goldman Sachs, accusing them of exploiting Japan. "Now, with Shinsei, Japanese people have seen the predatory face of capitalism - a type of capitalism that lives by the law of the jungle," declared Banri Kaieda, a politician with Japan's opposition.
On February 14 2003 - a date usually better known as Valentine's Day - the Shinsei board gathered for its last meeting before the insurance clause ran out. By coincidence, it also happened to be Yashiro's 74th birthday. And, to his delight, after three years he finally had some good news to unveil. During 2002, the bank had started to post healthy profits - in sharp contrast to the other Japanese banks. Most remarkably, in three years, the bank had cleaned up some ¥2,700bn of bad loans from its balance sheet, cutting them from 30 per cent of all assets to a mere 5 per cent. It had done so partly by handing about ¥1,000bn of troubled loans back to the government and by selling bad loans to other Japanese banks, which were so worried about seeing a repeat of the Sogo incident that they were willing to buy Shinsei out of its exposure to "sensitive" customers. It also forced troubled borrowers to restructure or face bankruptcy.
It is still not entirely clear that Shinsei has completed the second task that any American banker would consider crucial for "success" - finding a way to generate sustainable profits. It is difficult to make money from the core business of lending to corporate clients because interest rates are so low. And, while the bank has been trying to offset this by developing investment banking products and offering sophisticated retail services, it is not clear whether Japanese consumers or small companies are willing to pay high fees for these products yet. However, the US investors insist this is simply a matter of time and this month said they were already planning to sell part of the bank on the Tokyo stock exchange early next year.
There is no consensus yet whether Japan itself considers the experiment a success. "I hoped it would become a model for Japanese institutions," says Michio Ochi, a senior politician who was running the main regulator in 1999 and thus oversaw the sale of LTCB. "But I have lost faith in that idea." Others point out that rival Japanese banks are quietly copying many of Yashiro's innovations, even while they are criticising him. "Sometimes I think that this shouting is just a sign that the old guard knows it is losing," says one senior Japanese banker. "Change is inevitable."
As he points out, the Meiji period was marked by bloody civil war that left the population bitterly divided about adopting foreign ideas. In comparison to that long civil war, the past three years of battles around Shinsei look relatively tame. Indeed the first chapter may barely have been written.
In some ways, it seems a harder task. Previously when Japan opened itself to foreign ideas, it was mostly to copy industrial techniques. But now it is a mature economy, and what it urgently needs to tackle is not the state of its manufacturing industry, but the non-manufacturing parts of its economy: the service sector, creative businesses, processes of innovation and the way that finance is allocated.
Meanwhile, what of Yashiro? He insists he is satisfied.
"I don't regret taking the position of president of Shinsei. It has been much harder than I expected. But I truly believe that eventually the rest of Japan will appreciate what we have done at Shinsei and realise that this is what all Japanese banks should be doing.
"If Japan doesn't change," Yashiro warns, "if we just keep muddling through, we will keep declining as a nation. We will end up being just an eastern province of China in 15 years."
Gillian Tett was the FT's Tokyo bureau chief, and now writes for the Lex column. Her book "Saving the Sun" will be published early next year by Random House in the UK, and is published in the US this month by HarperBusiness. |
