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Number 1 Shimbun

Tokyo Star-Crossed

 

The intriguing twists and turns

and compelling characters of a "local"

bank's ups and downs.

 

by Peter McGill

 

Not many hearts will start pounding faster upon hearing that CTBC of Taiwan has bought Tokyo Star Bank, despite the fact it is the first foreign acquisition of a non-bankrupt Japanese bank.

And not many journalists will get late-night calls for copy, even though financial historians may also wish to note that it is the first time a foreign bank, as against a group of foreign investors, has bought a Japanese bank.

But is it important? Of course! Fascinating? That depends on where you start to look. . . .

In fact, when I peered behind the drab official curtain, a strange drama was revealed. The cast includes a Japanese banker besotted by France who was a friend of Jacques Chirac and was brought down by speculative hubris, and a squeaky-clean Mormon who succeeded him.

There’s plenty of action in Taiwan with a Chinese merchant opening the gates of Taipei to Japanese soldiers, being richly rewarded for his allegiance, and eventually being elevated to the House of Peers. One of his many offspring then co-founds a major Taiwanese bank and becomes a pillar of Taiwan society. Alas, his wayward son and heir brings disgrace on the bank and family through insider trading, flees to Japan to escape arrest, and then returns to face justice and a lengthy prison sentence.

In the final act, all the wildly disparate strands come together, and everyone concerned, not least the Japanese and Taiwanese authorities, slam shut the bin of history and affect a broad smile.

 

THE TALE BEGINS IN Japan with a timber dealer’s son named Shoichi Osada. In 1949, he used the profit from selling family timber to the national railways to found Tokyo Shokusan Mujin, a kind of loan cooperative. Mujin date back to the 14th century, and traditionally were rotating credit associations, in which a group of people make regular deposits and take turns to win the pot, usually by drawing lots.  The link to gambling ruffled the puritanical sensibilities of Gen. Douglas MacArthur’s Occupation advisers, and a 1951 law converted the mujin into mutuals. Osada’s Tokyo Sogo Bank later demutualised in 1989 and was renamed Tokyo Sowa Bank.

Osada had only an elementary school education, but was the unchallenged ruler of Tokyo Sowa, first as its president, then as chairman. During the asset bubble of the late 1980s, the bank poured vast amounts of money into Kanto real estate. At its peak, it had a balance sheet of ¥2.27 trillion and earned the sobriquet of  “the bank of Ginza and Akasaka.”

 

The Awashima Hotel had 200 staff for 138 guests,

a wine cellar stocked with 4,000 choice bottles,

its own concert hall

and an ocean aquarium.

 

In 1984, Osada bought an uninhabited island in Suruga Bay with stunning views of Mount Fuji. There, he set about building one of the most expensive hotels in the world. The Awashima Hotel had 200 staff tending to the needs of no more than 138 guests, a wine cellar stocked with 4,000 choice bottles, its own concert hall and an ocean aquarium. Art works from Osada’s personal collection, said to include 1,000 Impressionist paintings, lined the walls.

VIPs were ferried to the island in Osada’s luxury yacht to be wined and dined at the bank’s expense. Along with Tokyo Sowa customers came Ministry of Finance bureaucrats, Japanese politicians, and French celebrities, most notably Jacques Chirac, mayor of Paris from 1977 to 1995, then president of France until 2007.

 

MYSTERY AND RUMOUR SURROUND Chirac’s relationship with Japan, a country he visited 54 times in 37 years. The French press suggested that the love affair went beyond Japanese art and sumo to include a “family entourage.” In 2006, two investigating French magistrates (juges d’instruction) found a note from the French external security service, the DGSE, implying that Chirac once had ¥7 billion in a secret account opened at Tokyo Sowa in 1992. Chirac denied the allegation.

Osada claimed to have been friends with Chirac for “half a century” and in May 1995 was the first Japanese businessman invited to the Elysée after Chirac’s inauguration. In gratitude for his services to France, he was awarded the Légion d’Honneur.

 

An auction was won by Texan vulture fund Lone Star,

with a bid of ¥40.3 billion.

The Japanese taxpayer had to stump up several times more.

 

But after Japanese land and property prices started to tumble in 1992, Sowa Tokyo found itself in trouble. In spite of two capital infusions in 1998 and 1999, and a desperate attempt to keep the bank afloat by cavalier lending to loan sharks, many linked to the yakuza, the bank collapsed in June 1999 with a capital deficit of ¥102.2 billion. One year later, Osada and another four senior executives of the bank were charged with fraud in trying to conceal the crater. In 2003, Osada was handed a three-year suspended prison sentence.

The carcass of Tokyo Sowa drew intense bid interest, thanks to the prospect of generous inducements from the Japanese government. An auction was won by Texan vulture fund Lone Star, with a bid of ¥40.3 billion. The Japanese taxpayer had to stump up several times more. The Deposit Insurance Corporation made a grant of ¥762.6 billion to recapitalise the new bank, while the state’s Resolution and Collection Corporation paid ¥502.7 billion book value for Tokyo Sowa’s bad loans, of which it later recouped just ¥124.2 billion.

 

LONE STAR RENAMED THE bank Tokyo Star and for its head chose Todd Budge, a former Mormon missionary who was fluent in Japanese. In 2003, he became the first foreign – and at the age of 43, by far the youngest – president of a Japanese bank.

Budge helped restore what he once called “this incredible train wreck” to profitability, and wrote a book in Japanese called You Can Do It about his philosophy of “empowering” customers. Cynics would retort that Japanese taxpayers had cleared away much of the Tokyo Sowa wreckage beforehand, while closing most of its branches and getting rid of many of its staff performed wonders on the profit-and-loss statement.

Lone Star listed Tokyo Star on the Tokyo Stock Exchange in October 2005 and sold one-third of its holding for ¥85.4 billion.  Looking for an exit, Lone Star agreed to sell its remaining 68 percent of the bank to Japan’s first, and largest, private equity group, Advantage Partners, at the height of the leveraged buyout boom in December 2007.  The next year, Advantage Partners made a tender-offer bid and bought all outstanding shares in Tokyo Star for ¥250 billion. Advantage Partners borrowed the ¥170 billion needed to buy Lone Star’s majority stake from Lone Star and a group of banks.

 

 Hashimoto-Chirac.jpg

 Jacques Chirac (above) denied he had ¥7 billion in the Tokyo Sowa Bank.

Todd Budge (below) helped restore the "train wreck" Tokyo Star Bank

Sep09_04_Todd_Budge_PL13.jpg

 

Richard Folsom, the co-founder of Advantage Partners, graduated from Brigham Young University the same year as Budge, and the pair had also worked together at Bain, the American management firm that employed Mitt Romney, a fellow Mormon and the Republican challenger to Barack Obama in 2012. When Advantage Partners took over Tokyo Star, Budge became chairman until he retired three years ago. He is now president of the Mormon Mission in Japan.

Advantage Partners intended to repay money borrowed to buy Tokyo Star with dividends to be paid by the bank. The plan was hatched just as the financial crisis broke. As bad debts began to multiply, Tokyo Star started losing money and stopped paying dividends, causing Lone Star and the other creditors to seize all of the bank's equity in 2011. The price CTBC is now paying for Tokyo Star, ¥52 billion, is just one-fifth of what Advantage Partners paid for the bank only eight years ago.

CTBC, which used to be called Chinatrust, is Taiwan’s largest privately owned bank. Koo family interests, collectively, rank as the biggest shareholder and still wield considerable power in the boardroom. The Koo’s are one of Taiwan’s five wealthiest families, and partly owe their good fortune to an astute move by the patriarch, Koo Hsien-rung, who sided with Japan in its war with Qing dynasty China at the end of the 19th century. On June 6, 1895, Koo opened the main gate to the city of Taipei and welcomed Japanese troops. Japan was duly grateful and rewarded Koo with some lucrative monopolies. In 1934 the Showa emperor made him the first non-Japanese member of the House of Peers in Tokyo. One of his grandsons is Richard Koo of Nomura Research Institute, possibly Japan’s most famous economist.

Chinatrust was co-founded by Jeffrey L. S. Koo, “father of the credit card” in Taiwan, and chairman of the bank until his death in 2012. Eldest son Jeffrey Koo Jr., a former fashion model with a master’s degree in business administration from Wharton, was vice chairman and heir-apparent until he engulfed the bank in scandal.

 

Koo resigned as vice chairman of Chinatrust

the day after prosecutors issued a warrant

for his arrest, and fled to Japan.

 

In 2004, Chinatrust attempted to take over Mega Financial, a banking group controlled by the Taiwanese government. Taiwan’s financial regulator discovered that Koo Junior had instructed the Hong Kong branch of Chinatrust to buy $390 million of notes issued by Barclays that converted into shares of Mega Financial. These notes were then sold at a steep discount to a paper company called Red Fire Developments, capitalized at $1.

Koo reaped a windfall profit of $30.47 million through Red Fire’s illegal trading, which he then had wired to offshore companies. When rumbled, he returned $20.9 million to Chinatrust but kept the rest in a Hong Kong front company controlled by his family. Most of this money was funnelled to the family of Chen Shui-bian, Taiwan’s president from 2000 to 2008, as “political donations.”

Koo resigned as vice chairman of Chinatrust the day after prosecutors issued a warrant for his arrest, and fled to Japan. In November 2008, however, he flew back to Taipei in his private jet and was handcuffed on arrival. Koo was later found guilty of fraud and embezzlement. Three other senior executives of Chinatrust also received jail terms.

Chen Shui-bian and his wife were found guilty of corruption and are now in prison. Koo is appealing his conviction to Taiwan’s Supreme Court.

The scandal has given new meaning to the corporate motto of CTBC, now the proud owner of Tokyo Star Bank: “We Are Family.”

Peter McGill is a former Tokyo correspondent of the Observer and former president of the FCCJ.

 

 

 

Published in: August

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