He was laughing when he said it, and the audience laughed too, but there was a hint of steel behind senator Kotaro Tamura’s accusation that the Japanese banks have been shown to be chickens, rather than wise men, by recent events. There are many financial institutions worldwide that would admit that their good health owes more to fortune or innate caution than any inkling of a premonition of the present predicament, yet Tamura singled out the Japanese megabanks as being particularly over-cautious and lucky. It is too early to say for certain how wise the investments each of the three megabanks made are. Unfortunately for senator Tamura, though, the evidence thus far suggests that caution has again won the day.
Mizuho Financial Group was the first to invest in a distressed foreign bank, and when it bought $1.2 billion of Merrill Lynch convertible preference shares in January through its subsidiary corporate bank the Japanese firm was clear that the investment was for financial purposes only. Judged on those terms, the results have been uncertain at best: Merrill Lynch shares traded at about $50 at the time of purchase but by the time the banks agreed a new conversion price of $33 in August, the stock had been in free fall, dropping as low as $25 in July. Now the shares will be converted into Bank of America preferred stock, and Mizuho is talking of strategic benefits from the investment rather than pure financial gain. It looked initially as if it was a smart financial investment but whether Mizuho’s senior management are pleased with the present situation or not they can hardly have expected that they would be buying in to Bank of America when they put money in Merrill.
Next came SMFG, Japan’s third-largest bank, with the £500 million ($904 million) stake in Barclays that it took in June. After a spike to $32 in mid-September, Barclays’ stock is at the time of going to press almost exactly where it was when the investment was made in June, at about $25. SMFG has been keen to emphasize that the investment is not purely financial, and it has named areas such as project finance and commodity derivatives where the two institutions could work together more closely. It’s impossible to say at this stage whether there will be more strategic advantages in this tie-up than in Merrill-Mizuho-BoA but judged purely on financial terms SMFG’s spending looks wiser.
Last came MUFG and its investment in September of $9 billion in Morgan Stanley. After conversion, MUFG will have a 21% stake in Morgan Stanley: the investment is on a different scale to the other banks’ yet it is unclear how much strategic benefit the Japanese firm will derive from having a seat on the board of the US bank and a one-fifth share in voting rights. The preferred shares yield a hefty 10%, and Morgan Stanley is in better shape than Merrill Lynch now that it has protected itself via a change in company status.
Some bankers in Tokyo speculate that a Morgan Stanley/MUFG joint venture similar to Nikko Citi could be launched in Japan; for now, though, they tend to agree that the last Japanese bank to deploy its capital got the best deal. MUFG’s timing was better than its peers in that it looks to have invested near the bottom of the market, and it has walked away with a more substantial stake in a firm that looks in better shape and has a stronger pedigree. The one cause for concern is that worries about Morgan Stanley’s declining value meant that MUFG didn’t have time to complete much due diligence.
MUFG is traditionally regarded as the most conservative of Japan’s big financial institutions, which is to say very conservative indeed. Senator Tamura’s point, as he spoke at Euromoney’s Japan Capital Markets Congress on the subject of Japan’s place in the new financial world order, was that the recent trend for conservatism to look smart in financial institutions might lead Japan’s banks to learn the wrong lesson from the present crisis and not take advantage of the opportunities they now have. They must not be reckless in expanding outside their areas of competence, though: the worst sort of chicken, after all, is a headless one.
