Japanese to the Rescue Too (to Their Detriment)

Never ones to miss an opportunity to lose money, the top Japanese banks, finally having recovered from lending against wildly overvalued collateral, and then suffering nearly two decades of working out zombie loans (or more accurately, being insolvent but being allowed to operate anyhow, since reviving the crappy banking sector one has is easier than letting it collapse and trying to start afresh), closing foreign operations, and being forced to consolidate, taking and repaying government loans, are now healthy enough to again take unnecessary and probably unwise risks.

And what do they propose to do? Invest in failing US financial services firms, just like the Chinese and Gulf State sovereign wealth funds. Mizuho, Japan’s second largest bank, joined in the latest rescue financing for Citigroup, and the other big banks are ready to join the fray.

Now in the abstract, buying distressed assets can be a phenomenal business, but it generally requires considerable analysis and a cast iron stomach, neither of appears operative with the Japanese plans. Even though the Japanese firms are technically banks and thus might have insight into their US counterparts, their version of the banking business and the US counterpart have about as much in common as, say, dachshumds and hyenas, in this case, well fed, well mannered dachshunds and starving, diseased hyenas.

What is the real sign that these salvage operations are almost certainly turkeys? Where are the locals? One of the reasons that foreign buyers get taken is that good deals can almost always be closed domestically. Unless there is a very good reason that a seller is looking for a foreign investor (the classic is to secure overseas distribution), a offshore investor should assume he is being approached because no one in the home market would buy in, and with good reason.

And who in America has shown up to support these iconic financial institutions? So far, only Sandy Weill and the New Jersey Division of Investment have stepped forward. Both can be viewed as interested parties.

From the Times (UK):

The three wealthiest Japanese finance houses are set to step into the worsening sub-prime carnage as the “silent investment partners” of Wall Street and Europe’s stricken banking titans.

Senior sources at the “big three” Tokyo megabanks told The Times that they had readied a combined cashpile of as much as $10 billion (£5 billion) and were open to negotiation with any struggling Wall Street bank that approached them for a cash infusion.

Mitsubishi UFJ (MUFJ), Mitsui Sumitomo Financial Group (SMFG) and Mizuho Financial – banks that have been scarred only very lightly by the sub-prime crisis in the United States – are understood to have already opened preliminary talks with several American firms.

One MUFJ insider said that his firm was planning to compete directly with the leading Asian sovereign wealth funds as a long-term investor in the troubled American banks. The Japanese banks, flush with cash and desperate to find ways of raising their return on capital, are keen to become central players in what some predict will be an all-Asian solution to the sub-prime woes contorting America and Europe…..

The Japanese banks’ interest in investing in distressed US banking names comes as they are keen to expand their overseas operations after nearly two decades of timid confinement to their domestic market after the bursting of the Japanese bubble.

The ultra-conservatism of the Japanese banks dates from their own financial crisis that came to a head in 2003 with the collapse of several leading players. But by the end of 2006, the banks had mostly paid back the emergency cash with which the Government rescued them. “With the public money repaid, the Japanese banks are under pressure from investors to use their capital more effectively. Banks’ managements are being told to look for investments every single day, and they see these Wall Street firms as a good chance to do that,” Shinichi Tamura, a banks analyst at UBS, said.

Citibank, Lehman Brothers and Bear Sterns are among American firms rumoured already to be in talks with Japanese banks, as well as other Asian investors and sovereign wealth funds.

The Mizuho deal represents the first time since 1989 that a Japanese financial house has taken a substantial stake in a “bulge bracket” American or European banking name.

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One comment

  1. a

    I think a good test is: is any part of bonuses paid in shares? The insiders of the company know the company better than anyone, and if they are not willing to invest, then stay clear.

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