The Road To Ruin

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DONALD MACINTYRE TokyoOnly a decade ago, Japan's monster banks seemed poised to take over the world. These days the fear is they could collapse, and bring the world down with them. To understand how these mighty banks have fallen, consider the saga of a real-estate tycoon known as the Bubble Gentleman and his marriage of convenience with a bank that once stood at the pinnacle of the nation's financial sector: the Long-Term Credit Bank of Japan.It is a tale of greed, ambition and multimillion-dollar deals sealed with crates of French wine and fine champagne. The bit players range from reckless bankers to Finance Ministry mandarins with a weakness for geisha and fine sake. And at the center stands Harunori Takahashi, a blue-blooded descendant of feudal lords. Nicknamed Baburu Shinshi, or Bubble Gentleman, Takahashi became synonymous with the frenzy of land and stock speculation a decade ago that gripped all of Japan, including banks like LTCB.Since it began edging toward collapse this summer, LTCB has been a litmus test of Japan's resolve to tackle its banking crisis, after years of dithering. Last week LTCB became the first Japanese bank to be nationalized since World War II. The move was part of a broad package--including banking-law revisions and a half-trillion-dollar rescue plan--that Tokyo hopes will restore confidence in the country's rickety financial system. LTCB's demise as an independent institution is a sure sign that the authorities no longer will prop up every sick bank, however big. LTCB executives have all been sacked, and the bank no longer poses risks to financial markets.But Japan isn't out of the woods yet. Even the banking rescue package does little to address the lack of transparency, accountability and plain prudence that got LTCB and so many others into such trouble. The public still doesn't know exactly what went wrong at LTCB. The government continued to pretend the bank wasn't bust until it asked to be nationalized. Efforts to fix other problem banks are moving even more slowly. Some will be allowed to accept public handouts without having to fire their top managers--Japan's opposition pushed for tougher rules but failed to nail them down. And since the banks aren't being required to reveal the true state of their finances, they can use the public money to plaster over holes in their balance sheets instead of restructuring. They are putting new wine into old bottles, says Ryuji Konishi, a former LTCB managing director.The next few months will be critical. If banks start using public money to write off bad loans, they could begin to return to health. But that would mean cutting off lifelines to ailing construction companies, which support the ruling Liberal Democratic Party and provide millions of jobs. The banks may prefer to keep stalling. Says Seiji Otsuka, a banking analyst at Schroders Japan: The question is: Is Japan ready to accept the pain?Japan was going through another rough patch when LTCB opened its doors in 1952. With Japanese companies supplying war materiel to U.S. troops fighting in Korea, the country's war-devastated economy was finally showing signs of life. But Japan's economy still had a long way to go. There were no bullet trains and no television; most homes in Tokyo didn't have flush toilets, or even baths. The government created the bank to funnel long-term loans to industries like shipbuilding and steelmaking, seen as the building blocks of recovery.PAGE 1  |    |  
 
In those days, LTCB was a prestigious place to be. If Japan's other long-term lender, the Industrial Bank of Japan, was the top choice of university graduates entering the banking world, LTCB was a close second, according to Hiroshi Takeuchi, a former LTCB banker. This was not a place for entrepreneurial daredevils. It was the creature of a quasi-socialist financial system where bankers followed blueprints drawn up by an army of bureaucrats, who didn't trust the markets to supply companies with needed capital. We always had the sense we were working for the good of the state, says Takeuchi. LTCB maintained that attitude right up to the end.By the 1970s, however, the bank had already begun to outlive its usefulness. Companies were bypassing the banks and raising money directly in the financial markets. LTCB started casting around for a new purpose. But the Industrial Bank of Japan, around since the turn of the century, had a lock on the best blue-chip customers. The commercial banks occupied the small-business niche. Desperate for new clients by the mid-1980s, LTCB started eyeing the real-estate market.The foray into property lending marked a dramatic break with LTCB's staid corporate culture. In the view of most bankers, land developers were rough types with uncouth manners and loud clothes. So the bank's men were elated when they crossed paths with Takahashi, the head of a small electronics firm with a flair for real estate. Young and dynamic, Takahashi was a graduate of prestigious Keio University, as were some of LTCB's bankers. Descended from a family that once ruled Nagasaki prefecture, he counted a prewar Prime Minister among his ancestors. In short, he was a man the bankers thought they could trust.His timing was impeccable. As interest rates dropped, the land and stock bubble was starting to inflate. Soon LTCB and other banks would have more money than they knew what to do with. Takahashi had just cut an innovative deal to buy a Hyatt hotel in Saipan, and that caught the attention of the bankers at LTCB, says his former adviser and top dealmaker, Bungo Ishizaki.Ishizaki soon saw for himself what the tycoon was capable of when the two went to Sydney to purchase another Hyatt hotel. The day after their arrival, the pair hired a car and driver to show them around. As they waited at a traffic light, Takahashi suddenly gestured across the waterfront to the Regent Sydney Hotel. He demanded to be driven there immediately. After a quick glance at the lobby, Ishizaki recalls, Takahashi said: We're going to buy this hotel. Takahashi had a rare knack for choosing properties, says the former adviser, and the bankers saw this early on. He was a good picker of the horses, says Ishizaki. They couldn't shove money into his pockets fast enough.LTCB and its affiliates kept shoveling. By his own account, loans to Takahashi and his companies totaled $5 billion by the end of the decade. Takahashi assembled an empire that stretched from resort developments on Australia's Gold Coast to the I.M. Pei-designed Regent Hotel in Manhattan, now the Four Seasons. While he may have lacked the patience for paperwork, he made up for it in nerve. In the late 1980s, Ishizaki recalls, Takahashi flew unannounced into Vietnam on a private Boeing 737--complete with karaoke facilities, movie-screening room and on-board chef--and sold Ho Chi Minh City its first international-standard hotel. Using cases of French wine and Dom Perignon to smooth his way, he promised to build a luxury hotel in less than six months. Vietnamese officials were skeptical, but Takahashi made good on his promise by shipping in a floating hotel and mooring it off Ho Chi Minh City. He once even flew most of the Cabinet of Fiji to Tokyo to drum up investment for his interests in the Pacific island nation, remembers Ishizaki.  |  2  |  
 
Much of Takahashi's empire was built on LTCB money. Other banks were also running wild in the real-estate market, but few put so many eggs in one basket. Yet former LTCB executives say nobody at the bank really had a handle on what was happening. LTCB didn't even bother to crunch the numbers for the proposals Takahashi and his adviser threw the bank's way. They used to take a plan that I would slap together and just change the cover, recalls Ishizaki. They had no experience whatsoever in real-estate lending.But Takahashi knew his house of cards would collapse if LTCB stopped lending. According to Ishizaki, the two frequently described the situation in Japan as a bulb, a reference to the speculative tulip bulb craze in 17th century Holland. Things started to fall apart in the 1990s, after Japan's central bank cranked up interest rates to deflate the bubble. LTCB finally pulled the plug in 1993. Takahashi allegedly started siphoning money out of two credit unions he had ties to and pumping it into his companies. When the credit unions went bust, the Finance Ministry stepped in to bail them out--outraging many Japanese. Takahashi was angry, too, and accused the LTCB of first egging him on, then withdrawing support when he hit a bump in the road. The LTCB abandoned me, he wrote in a weekly magazine.Japan's regulators deserve some of the blame, as well. LTCB has always enjoyed close ties with the Finance Ministry. Since the early 1980s, a former ministry official has served as one of LTCB's in-house auditors. Takahashi regularly treated ministry bureaucrats to evenings at a Tokyo restaurant where kimono-clad geisha poured the sake. The Ministry of Finance was among the culprits in LTCB's collapse because it failed to police the bank properly, says Noboru Yanai, a former LTCB branch manager: Looking back, their inspection was loose. The bankers outsmarted the bureaucrats.The markets finally punished LTCB for its free-lending ways last June, after a respected Japanese monthly ran a story saying the bank was on the verge of collapse. Its stock price plummeted 70% over the next few weeks. The same month, U.S. Deputy Treasury Secretary Larry Summers arrived in Tokyo, determined to prod the Japanese into doing something about their banking system before it triggered a worldwide financial panic. As Japanese lawmakers scrambled to come up with a bank rescue plan, LTCB turned into a political football. Newly assertive opposition parties, sensing they had the public behind them, demanded full disclosure of what had gone wrong at the bank. The ruling Liberal Democratic Party battled to defend the status quo, as well as the jobs a bank failure would wipe out. Arguing that the bank wasn't really broke, party elders tried, unsuccessfully, to force another lender to take it over.When the banking package passed the Diet last month, the world breathed easier. At last, Japan appeared to be taking the problem seriously. Half a trillion dollars looked like enough to prevent a meltdown. But the final package was a political compromise that gutted much of the opposition's proposal for greater transparency and stricter accounting rules. Banks can still overvalue their assets and skimp on reserves for bad loans. And some of the woolier practices that LTCB allegedly engaged in are still legal. Banks can shunt bad debts into an affiliate, often paper companies set up for that purpose. Many continue to lend to deadbeat companies, which use the money to meet their interest payments, allowing the banks to keep soured loans hidden. The upshot, analysts say, is that the banks still aren't under the gun to get healthy.The LTCB's executives will leave the scene. (Unrepentant, the bank's last president, Tsuneo Suzuki, complained before stepping down: We weren't given enough time.) But many executives who led the charge during the bubble years will stay at the helm of their banks, trying to plug the leaks with public money. The government has promised within three years to pursue the issue of responsibility. But few expect Tokyo to follow through. And the Bubble Gentleman? Takahashi still lives in a comfortable home in an upscale Tokyo suburb, with his wife and dogs. But his days of jetting around the globe in search of deals are over. He is on trial for breach of trust in the credit-union affair (he says he can't speak to the press until his legal troubles are sorted out). And he still owes LTCB--that is, Japanese taxpayers--at least $1.5 billion. That's a lot of adversity, especially for a gentleman.With reporting by Sachiko Sakamaki/Tokyo  |    |  3