When Dai-ichi Kangyo bank, Fuji Bank and Industrial Bank of Japan merged in 2000 to create the world's largest bank, managers wanted to christen the venture with a hopeful name, a word to signify a new era of Japanese banking free from the backward ways that have helped to cripple the world's second largest economy. The name they chose was Mizuho, meaning "a fresh ear of rice."
Two years later, the merger has gone down as one of the worst in global corporate history. The bank has stumbled from one humiliation to another, including ATM network failures, executive turf wars, lingering bad loans, eroding asset values and a stock price that has fallen 85% since its September 2000 listing. Last week came the bleakest news yet: on Jan. 21, Mizuho Holdings president and CEO Terunobu Maeda announced that the bank expects to lose $16.53 billion for the fiscal year ending in March. That would be the largest loss in Japanese corporate history, and is nine times worse than results the company predicted just three months ago. Maeda followed that stunner with another: to replenish its rapidly evaporating capital, Mizuho is planning to raise a staggering $8.47 billion from investors by the end of March—the largest financing round ever undertaken by a Japanese bank.
The new rules could put many major Japanese banks in imminent danger of failing to keep their ratio of capital-to-assets above 8%—a crucial industry minimum that banks must maintain to conduct business internationally. More importantly for executives looking to save face (and their jobs), 8% is also the magic number at which the FSA can forcibly recapitalize a bank or place some operational control in government hands. Desperate to raise capital, Japanese banks are finally overcoming their deeply ingrained disdain for foreign investors. American investment bank Merrill Lynch was recently allowed to take an $849 million stake in a company created by troubled UFJ Holdings, Japan's fourth largest bank. And two weeks ago, Sumitomo Mitsui, Japan's second largest bank, sold $1.27 billion worth of convertible preferred securities to investment bank Goldman Sachs.
But Mizuho's precarious position and the sheer size of its offering will make it difficult to raise the money by the bank's stated deadline of March 31. "There are lots of questions about whether they can pull this off," says Brian Waterhouse, an equity analyst at HSBC Securities in Tokyo. Mizuho president Maeda has said that he is looking at foreign and domestic investors alike. Most likely, he'll have to sell preferred stock to the bank's own customers and close business partners. This will perpetuate a pattern of cross-ownership between banks and affiliated companies that is one of the toxic hallmarks of the Japanese economy and a major impediment to meaningful reform. The practice of banks having their borrowers as shareholders practically guarantees conflicts of interest. "Unfortunately," says Katsuhito Sasajima, an analyst at UBS Warburg in Tokyo, "the cross-capital holding structure is proving to be a very hard habit to break."
Analysts also wonder how much capital will be left over to save smaller banks if Mizuho's fund raising is successful. The banking behemoth does business with 70% of the companies listed on the Tokyo Stock Exchange plus thousands of smaller firms as well. "Mizuho could be the sponge that sucks up all the money," says HSBC's Waterhouse.
With all the bad news coming out of the banks and with Takenaka's surprisingly persistent cleanup efforts, many observers believe nationalization is a foregone conclusion for the weakest banks. "I don't see any way out," says Mitsuhiro Fukao, a professor of economics at Keio University, Tokyo, and reportedly a candidate to become governor of the Bank of Japan in March. Says Takatoshi Ito, a former Finance Ministry official and fellow contender for the Bank of Japan job: "This has been going on for some time, but the momentum for crisis is building." A turning point in Japan's intractable financial mess may, for better or worse, finally be at hand.