Saving the Sun
Ripplewood and Shinsei: the first foreign takeover of a Japanese bank.
Summary
Tett covered Japan for the Financial Times through the banking crisis and tells the story of Japanese banking's collapse and partial resolution through the case of Long-Term Credit Bank, which failed, was nationalised, and was then sold to Ripplewood, an American private equity firm, becoming Shinsei Bank.
The institutional analysis is the substance. Tett explains the postwar Japanese financial system: the convoy system in which the Ministry of Finance ensured no bank failed, the main bank relationships that made lending a matter of obligation rather than credit analysis, the cross-shareholdings that insulated management from any market discipline, and the accounting and regulatory forbearance that allowed banks to carry non-performing loans for a decade rather than recognise losses. Her argument is that these arrangements worked well during the high-growth period and became disastrous once growth stopped, because they had no mechanism for allocating losses.
The Shinsei episode is the test case. The foreign owners applied Western credit practice, called in loans to insolvent borrowers, and were attacked publicly for doing what the previous system had prevented anyone from doing. Tett uses this to examine what actually changes when a foreign owner imposes different norms and what does not.
Her anthropological training shapes the treatment, and the account of how professional norms rather than rules governed behaviour is the most useful part. The book is from 2003 and Japan's banking system has since been restructured further, so the specific situation is historical.
Key takeaways 7
- The Japanese convoy system, in which regulators ensured no bank failed, removed the mechanism for allocating losses and made forbearance the only available response to bad loans.
- Main bank relationships made lending a matter of long-term obligation rather than credit analysis, which worked while growth continued and failed when it stopped.
- Cross-shareholdings between banks and their corporate borrowers insulated management from market discipline and concealed the connection between the two balance sheets.
- Regulatory and accounting forbearance allowed banks to carry non-performing loans for a decade rather than recognise the losses, which prolonged the contraction.
- Recognising losses requires a political decision about who bears them, which is why financial crises are resolved on political rather than technical timetables.
- Foreign ownership of Shinsei imposed credit practices that produced immediate results and immediate political backlash, since calling in loans was the behaviour the old system existed to prevent.
- Professional norms rather than formal rules governed Japanese banking behaviour, which is why regulatory change alone did not alter practice.
Who should read it
Investors interested in how banking systems delay loss recognition and what changes when outside owners impose different norms.
About Gillian Tett
Financial Times columnist and editorial board member, and Provost of King's College, Cambridge; trained as a social anthropologist.
Fool's Gold follows credit derivatives from the J.P. Morgan team that designed them to the losses of 2008, showing how an instrument built to transfer risk was used instead to add leverage. The Silo Effect applies anthropological fieldwork to organisations, examining why specialised teams inside banks and technology firms stop passing information to each other.
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