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'Foreign capital' attacks
helpless Japanese banks -a Tokyo daily's take on
the CSFP episode |
Picture the scene. You are on Tokyo's Ginza Street, a crowded four-lane highway that's the site of some of the world's busiest department stores. It's 3pm on a Saturday and a vehicle is driving in the middle of the road blaring out an order over its loudspeaker. All the cars quickly leave and old ladies in straw hats appear. They put tables, chairs and parasols in the middle of the road. Only three minutes earlier that would have meant certain death.
Something remarkably similar happened to the Credit Suisse Group in Japan. Picture Credit Suisse merrily driving down a four-lane road, with other banks motoring along behind. The law says the way the Swiss firm is driving is okay, and others are moving along in the same way. Then a regulator tootles down the road and blares out an order that is loud but maybe not very clear. Other cars start turning off and soon Credit Suisse is the last vehicle on a remarkably empty road. Then it knocks down and severely injures an old lady in a straw hat carrying a table. After a six-month investigation it is banned from driving in Japan again.
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Ignoring Japan's unwritten
rules can prove fatal -
especially on Ginza street |
Credit Suisse's recent treatment raises many questions. No-one would suggest it is blameless, but it was certainly unfortunate. Its staff shredded documents during an investigation - which was wholly wrong - but the crime for which it was singled out - the sale of products designed to hide balance-sheet losses - wasn't even illegal. And every foreign firm was peddling such products. Credit Suisse's problem was that it wasn't heeding the little car blaring out garbled instructions in Japanese.
"At the beginning of last year we had started to feel that these transactions were beginning to be frowned on," says a foreign banker. "Credit Suisse missed the signal and kept on selling. They were very high profile. They even had brochures. They were the obvious choice."
The Japanese have a saying, points out Stephen Church of the research firm Analytica: ichibatsu hyakkai or "one punishment warns a hundred people". Credit Suisse - the first major foreign firm in Japan to have a banking licence revoked - looks to have been singled out for this exemplary role. Or maybe it is just the first of many.
Japan's new regulator, the Financial Supervisory Agency (FSA), an offspring of the banking bureau of the ministry of finance (MoF), is on a mission to treat Japanese and foreign firms on an "equal basis". This is bad news for foreign firms, which for many years were left to their own devices on the tacit understanding that the US Federal Reserve or the Bank of England were probably regulating them. This worked well for the foreigners. The Japanese authorities had more than enough to do holding their fragile financial system together and only made routine inspections every 10 years.
Policy shift
However at some point last year - some say partly in reaction to the Federal Reserve's treatment of Daiwa Bank - opinion changed. If the Fed was going to say that for regulatory purposes Daiwa becomes a US bank when it is in US jurisdiction, then a Citibank or a Chase become Japanese when in Japan.
This change of approach was accompanied by an equally significant - if subtle - change in the official attitude towards transactions designed to hide balance-sheet losses. Known as tobashi (the Japanese verb tobasumeans "to make fly away") ,these are not strictly speaking illegal and over the past decade were commonplace. A form of tobashi trade, repurchase agreements with clients that effectively guarantee profits, was responsible for the rash of losses and bankruptcies that humbled Japan's broking industry. The authorities have known what was going on for a long time.
Indeed, according to foreign bankers the MoF even encouraged troubled institutions to go to the foreigners to buy these specially structured deals, many of which involved complex derivatives. Certainly, documents obtained by Euromoney (see above) show that banks could be encouraged by the MoF to return several times to a foreign bank to roll over losses and disguise them in an ever more complex web of transactions - all of them economically nonsensical.
The deals came in many forms. The commonest did not even rely on derivatives - the instruments now excoriated by MoF and FSA spokesmen. One common debt disguise involved nothing more than a little balance sheet deviousness.
A customer of Credit Suisse Financial Products (CSFP) transfers problem loans to a trust account at Credit Suisse's Trust Bank. (One purpose of the trust account was to make the assets more difficult for regulators to trace). The client bank is paid for these loans and so does not need to disclose them as problem loans. In return the client bank lends an equivalent amount of government bonds to a different account at CS Trust, neutralizing the flow of cash between the two. A special purpose vehicle is then set up in a tax haven and these loans are injected into it. Next a bond is issued to CSFP at a sharp discount. After a given number of months or years, CSFP sells the bad loan bonds back to the client bank. The bad loans resurface on the balance sheet.