Saving the Sun

Gillian Tett

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061877636
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Saving the Sun tells the story of the world's largest private equity deal where American investors made billions of dollars rehabilitating Shinsei, a failed Japanese bank. Within that business saga is the dramatic tale of Japan's brightest financial minds, the men who made the Japanese economic miracle come to life, and their struggle against the economic failure in the 1990s. Into this climate of despair, where Japan seemed incapable of reviving prosperity, came a group of wily and determined Americans who would discover just how different the Japanese really are.

PART ONE

— Chapter 1 —

SAMURAI BANKERS

After the war we had a system that was really a type of socialism under the disguise of capitalism. The bureaucrats directed everything, in a wise way, and we all accepted that and worked together very hard. The system worked well for a few decades.

—Yoshiyuki Fujisawa, former chairman of IBJ

In the evening of June 8, 1999, the Tokyo police telephoned Katsunobu Onogi at his house. “Tomorrow we are going to arrest you,” the caller said politely, “please take care to be ready!” Staging the arrest so everything could be done in the proper fashion, the police asked Onogi to suggest a convenient location. Japan is clearly not a country that leaves room for surprises.

Nor was Onogi surprised. As he put down the telephone, part of him felt relieved. He was grateful that the police did not plan to drag him away in a disorderly fashion. At the age of sixty-three, Onogi had spent his entire life behaving with dignity and he had absolutely no intention of going to prison without being properly attired in the suit and tie that was the badge of a Japanese “salaryman.” The possibility of such shame appalled him.

At the same time, Onogi was terrified, too. Even with the correct clothes—and with all the perfect etiquette—prison was a frightening place. Onogi had always been an intellectual and methodical man. He wore large, bookish glasses and an impassive expression on his square face, broken only by a tense half smile that turned down at the corners of his mouth. Whenever he faced a problem, he liked to scour history books for answers and in the weeks leading up to his arrest, Onogi had furtively peeked into bookstores to see if there was any guide to what a middle-aged man should do in prison.

Alas, there was no way to bone up on the ordeal ahead. Nor had Onogi’s professional career given him any idea of what to expect in jail. Onogi could scarcely have imagined that he would share the fate of a common criminal. He had spent his whole life believing that he was a member of the elite, a respectable man who did things right, according to Japanese ideas of duty. He had slaved for forty years of his life in Long Term Credit Bank, one of Japan’s most prestigious banks, where he had risen to become president. Normally, such service would have guaranteed Onogi a comfortable retirement. Holidays in Hawaii; rounds of golf; group trips with former colleagues to Japan’s hot springs; the satisfaction of knowing that he had served his country well. That was how most sixty-three-year-old Japanese bankers lived.

But somehow it had gone horribly wrong for Onogi. LTCB had collapsed with almost $50 billion of bad loans, engulfing Onogi and his employees all in a shame that was too much for some of the most senior LTCB bankers to bear. A few weeks earlier, fifty-nine-year-old Takashi Uehara—the man who was expected to succeed Onogi as LTCB president—also received a telephone call from the police warning that his arrest was imminent: Uehara and the other LTCB managers were accused of hiding the bank’s bad loans. Uehara decided to commit suicide. Once the Japanese believed that the correct way to kill oneself was to slash the stomach open with four precise strokes of a sword, letting the guts spill out, a method known as seppuku. Nowadays, that was deemed “selfish,” since it created a bloody mess that needed to be cleaned up. Consequently, when executives committed suicide in the 1990s, they usually hung themselves in an anonymous hotel—to spare their family “shock.” Uehara had always been a stickler for etiquette: He checked himself into a little suburban hotel and hanged himself, leaving a note on the table for Onogi and the other LTCB bankers. It said: “I am so sorry.”

Onogi, however, did not want to kill himself. He considered it his duty to suffer his shame alive—to “endure the unendurable,” as the Japanese emperor had described the American conquest after World War II. So, he fixed his mind on cheerful things. He reflected on an Italian film he had just seen on television about a concentration camp in World War II, called Life Is Beautiful. Onogi liked the title, and he desperately tried to convince himself that life could be beautiful. “Life is beautiful!” he told himself. “Life is beautiful.”

He also resorted to his favorite mental survival trick: He imagined that he was looking down at himself from far outside his own body, as if he were an academic writing one of the sweeping pieces of history that he loved to read. Onogi had always found that trick comforting. It seemed to put life into perspective; to give a broader dimension to his own, little fate; to give a meaning to the terrible events that had engulfed LTCB. It was, he sometimes admitted with a dry chuckle, a very strange tale—not just for him, but for Japan.

And it seemed to be getting stranger, with every year that passed.

For Onogi, the LTCB story had started almost exactly four decades earlier, on April 1, 1959, a time when the pink cherry blossoms were blooming in Tokyo. On that day he turned up at the bank, as a fresh young graduate for his first day at work. “Onogi Katsunobu here!” he declared to an official, with a bow, using his surname first in the Japanese manner. He was wearing a suit and tie back then as well. But it was an ill-fitting, cheap, dark blue outfit, identical to the suits that all the other new graduate trainees wore. Fourteen years earlier Japan’s economy had been smashed to pieces in World War II. So the bank had assumed that the new trainees would be too poor to afford to buy their own suits, since these cost Y30,000 ($84) each, or three months’ average wages, so they doled out matching outfits to the graduates for free.

Onogi could have worn his own suit for his first day at work, if he had wanted. His ancestors had been “samurai”—literally, “those who serve,” or a privileged warrior class with a strong code of honor—who served Lord Maeda in the Kanazawa region of northwest Japan. During Japan’s bloody revolution of the mid-nineteenth century, when the country’s traditional shogun system was overturned and the samurai disbanded, some of his relatives had fought on the losing side and later committed suicide by seppuku. But Onogi’s father and grandfather had come to Tokyo, and, like thousands of other ex-samurai, laid down their swords and turned themselves into civil servants. Onogi’s father rose to a senior position in the local Tokyo government and bought a plot of land in the Aoyama area, later one of the most chic sections of Tokyo, where Onogi was born.

During World War II, the family home burned to the ground when American B-29 bombers created a firestorm in Tokyo by dropping incendiary bombs from low level. Onogi, a terrified nine-year-old child, watched the destruction. He never forgot the horror of that night. The family survived and after the war they retained enough wealth to send him to school and the elite Tokyo University, where Onogi chose to study agricultural economics. “I was interested in history and before the industrial revolution in Japan, agriculture was the economy,” Onogi later explained. He spent much of his time playing tennis at the university’s prestigious Akamon (“Red Door”) club, named after the traditional Japanese gate on campus. Onogi vaguely presumed that after graduation he would work in the government bureaucracy, like his father. But the elder Onogi happened to have a former classmate who was the president of LTCB, who suggested that Onogi come to the bank instead. Onogi knew little about banks. Indeed, like much of Japan’s elite, he had always considered commerce rather distasteful: The old culture of the samurai respected pure, ascetic lives. “At that time the Japanese economy was very stagnant and there were not many jobs around,” Onogi said. “Banks were one of the few places hiring graduates.” Onogi reasoned that bankers and bureaucrats had similar jobs, since both seemed destined to serve the nation as it recovered from the war. “I was attracted to LTCB,” he said, “because it was helping to rebuild industry.”

Jobs may have been scarce but the Onogis were still better off than most. Just before Onogi started work, his proud father took him to the tailor to buy a smart new suit.

Yet for his first day of work Onogi wore his nasty company uniform anyway. Japan was not a country where anybody ever wanted to stick out. Before World War II Japan had been a country riddled with social hierarchy, with the divine emperor at the peak. But when the Americans had taken charge, they had tried to impose new concepts of democracy and equality. Now everybody wished to appear middle class. So Onogi arrived at the shabby building next to Tokyo station where the bank was located, and filed obediently into a hall with the other, identically dressed new recruits, to listen to their president, Iwane Hamaguchi, address them. If they had been born a decade earlier, the men would have been conscripted into an army, wearing a uniform with imperial symbols; instead, they were “salarymen,” dressed identically to fight for Japan’s economic power.

“Welcome!” Hamaguchi declared, in a brief speech that explained that the new bank was now dedicated to support the industrial growth of Japan. “Gambatte—work hard and overcome!”

“We understand! We will work hard!” the graduates declared, with a deep bow, standing in a neat line. Onogi felt rather excited.

LTCB was considered a prestigious institution, a pillar of the economic system. The bank traced its origins back to the Meiji era of the late nineteenth century—a period when Japan’s government had decided to end its previous, self-imposed isolation from the rest of the world—and was frantically scrambling to industrialize its economy, to “catch up” with the West. In the Meiji era, as in the post–World War II era, the government embarked on this task with the same “catch-up” tactics: It sent young bureaucrats overseas to study the foreigners’ systems, copy the best ideas, and then bring them back to Japan. One of these emissaries, Masayoshi Matsukata, a government bureaucrat, visited Europe and was very impressed by the “Crédit Foncier” idea in France, whereby specialized banks provided credit to agriculture and industry. When Matsukata was appointed finance minister in the 1890s, he established the “Nippon Kangyo Bank” to act as a Japanese version of these “Crédit Fonciers.” The bank would raise funds by issuing bonds, and then use these funds to make cheap loans to agriculture and small business ventures. The idea spread, and soon afterward two more banks were created with similar structures: Industrial Bank of Japan, and Hokkaido Takushoku, a smaller regional group.

For four decades, these banks quietly flourished. They survived the financial turmoil that battered Japan in the 1920s and the global depression of the 1930s. Later, when Japan started building an Asian empire, Industrial Bank of Japan played a key role in financing the military industrial complex. Nippon Kangyo Bank developed a large lending presence in the Japanese colony that is now modern Taiwan. But after Japan lost the war in 1945, IBJ shriveled and Nippon Kangyo Bank was reduced to financing a hotchpotch of state initiatives, such as providing a Y30 million ($80,000) loan to create brothels to serve the incoming American troops. Many observers presumed that IBJ and NKB would eventually be dissolved, since all the banks’ reputations had been so tarnished by their role in World War II.

In 1952, IBJ and NKB were suddenly given a reprieve. As the American military administration was leaving Japan, Hayato Ikeda, the new finance minister, declared in parliament one day: “We need to consider new ways of financing our economy!” More specifically, Ikeda called for a council to discuss a crucial question: What type of financial sector should a newly independent Japan use to rebuild its country? One based around stocks, bonds, banks—or something else?

The choice was not obvious. Until the 1930s, the Japanese financial system looked similar to the systems in use in the United Kingdom and United States at the time. Companies raised part of their finance from banks, but also tapped the capital markets by issuing bonds and equities, and investors and other free-market forces played a powerful role in the financial world. Down in Osaka—historically the commercial center of Japan—there had been a long history of market trading. Then, with the rise of a Japanese military government in the 1930s, the army decreed that most of Japan’s financial flows should pass through banks, which were easier to control than anonymous markets, and the freewheeling market culture of Japan’s commercial class wilted in the face of heavy state control.

With the defeat and discrediting of the militarists in World War II, some U.S. officials initially wanted to rip apart the bank-centered financial system. Their rationale was simple: The banks had supported the rise of the military government and shared some of the blame for the war. These reformers had hoped that free capital markets would, in turn, support the development of democracy in Japan. However, by the time that Ikeda’s financial policy council convened in 1952, the Americans’ initial burst of enthusiasm for free markets and democracy had been replaced by hard-nosed strategic concerns. With the United States preoccupied by its cold war with the USSR—not to mention the heated fighting in nearby Korea—the American planners shifted their attention from reforming the financial and political culture of Japan to insuring a reliable source of industrial supplies from a stable Japanese economy. And Ikeda’s government believed that the best way to achieve this was to retain most of the wartime financial controls. Capital was extremely scarce in the ’50s and Ikeda believed that it was essential to channel Japan’s scarce financial resources to the industries that could quickly rebuild the economy again. Relying on stock and equity markets seemed risky, Ikeda argued, since the government might have different priorities from individual investors; it would be better to use the banks to push money around the economy, since this could be controlled.

Thus, in the summer of 1952, the Ikeda council decreed—with America’s tacit support—that banks, not capital markets, would henceforth be the main source of finance in the economy. The government did not abolish the idea of capital markets entirely: The Tokyo Stock Exchange was reopened. But, in Japan, there was a unique function for shares. They were not usually considered speculative or investment instruments, but as means for companies to solidify their ties to each other through a system of interlocking ownership known as “cross shareholding.” And these ties linked groups of companies into specific corporate “families” or “tribes” that were commonly known as “keiretsu.”

Into this system, Ikeda’s government also mixed the old Meiji era idea of “specialized” banks—overlaid with legislation similar to the Glass-Steagall act in America that separated financial functions into different corporate entities. Instead of allowing each bank to offer a range of financial services, separate categories of financial institutions were allotted different tasks. Brokers were given the task of handling the equity markets; “city” banks served consumers, and made short-term loans to large companies; “trust” banks focused on asset management services; and “regional” banks served small customers. Meanwhile, Ikeda also created a brand-new category of bank as his pet idea to help revitalize Japan, called “long-term credit banks.” These banks were authorized to provide long-term investment loans to “special priority” industrial sectors, such as steel or shipping. In prewar America and Japan companies usually raised these funds by issuing bonds to investors. However, Ikeda’s theory was that a “long-term credit bank” should issue bonds itself to raise funds and then lend this money to companies, like the old Nippon Kangyo Bank—eliminating the need for corporate bond markets.

So, in 1952 each of the banks in Japan was told to choose what type of bank they would become. Hokkaido Takushoku became a “city” bank and Nippon Kangyo Bank split into two. Half its staff created a “city” bank, eventually known as Dai-Ichi Kangyo Bank; the rest formed one of Ikeda’s specialized banks, with his close support. Unimaginatively, Ikeda’s pet was christened the “Long Term Credit Bank.” IBJ, too, opted to become a long-term credit bank and a third bank of this type, Nippon Credit Bank (NCB), was created a few years later. Long Term Credit Bank was given some office space in a library annex of the Bank of Japan—the best accommodation available at the time in bomb-flattened Tokyo—and started operations with a few dozen staff just as the new year of 1953 got under way. It was the first full year of independence from the American administration—and later known as “Year One of the Japanese Economic Miracle.”

Onogi spent the fi...