Book Reviews

Gillian Tett, Saving the Sun: A Wall Street Gamble to Rescue Japan from Its Trillion-Dollar Meltdown (New York: Harper Collins, 2003). $26.95 337 pages.

Reviewed by Scott B. MacDonald

Click here to purchase "Saving the Sun: A Wall Street Gamble to Rescue Japan from Its Trillion-Dollar Meltdown" directly from Amazon.com

Gillian Tett, the former bureau chief for the Financial Times in Tokyo, has written an excellent book about the rise and fall of Long Term Credit Bank and its attempted rebirth as Shinsei, owned by a group of American investors. In many regards, the fundamental thrust of Saving the Sun is that in Japan there has been reluctance to taking the tough measures needed to deal with the massive piling up of bad bank debt and that the solution could be with what Shinsei has done – a painful, yet committed effort to cut down on bad debt, even if it incurs the wrath of the government and vested interest groups. As she states: “…what this LTCB-Shinsei saga does do is to offer a general moral about structural reform: namely, that if a country continually tries to avoid short-term pain by clinging to outworn institutions, and refusing to adapt to a changing world with ‘creative destruction’ – in Schumpeter’s famous phrase – this can carry a terrible long-term cost, not just in terms of lost growth but also shattered lives.”

The LTCB saga has its roots in the Meiji era, though its formal start was in 1952, when the bank was created to provide long-term credit to priority industrial sectors in the postwar period. The Japanese government had a strong preference for putting the raising of capital for key industries, such as steel and shipping, in the hands of the banks, rather than in the hands of capital markets, which could be volatile. Consequently, LTCB and other long-term credit banks played a major role in the Japanese economic miracle during the 1950s and 1960s. By the 1970s, conditions had changed, with large successful Japanese companies no longer needing long-term credit banks and instead having the option of going to international credit markets. This meant that LTCB was forced to come to terms with the need for change. If not a long-term credit bank, what then? By the early 1980s the answer was to become an investment bank. Yet, as Tett notes, this was a revolutionary idea and LTCB has “the wrong staff to run an investment bank.”

In addition, the reformers within LTCB (regarded as the internationalists) faced considerable resistance to changing the bank. Tett captures the constitution of the domestic wing of LTCB: “The other was the ‘domestic’ tribe, or men who had forged their whole career inside Japan, making loans to Japanese corporations in the traditional way – over endless cups of green tea, building complex relationships of trust, recording it all on piles of handwritten paper, and occasionally skirmishing with the yakuza, Japan’s ubiquitous groups of gangsters.” The domestic tribe was initially successful in blocking meaningful reform. However, during the mid-1980s the landscape changed and with Japan’s economic boom the bank made advances into the world of investment banking. At the same time, LTCB got into the real estate market, a development that was to prove its undoing. When the bubble burst in the early 1990s, LTCB struggled with an ever-rising amount of bad loans. Finally in 1998, the bank was nationalized by the Japanese government.

The rest of Tett’s book focuses on the adventures of the Ripplewood Group, lead by Timothy Collins, who had a vision that the Japanese bank could be turned around if Western management was implemented. Although the Japanese government was to allow the foreign firm (which enlisted the help of the U.S. government, Vernon Jordan and Paul Volker) to assume control of Shinsei (the new name), the saga that followed was one of a substantial cultural clash on many levels. Shinsei, though led by Masamoto Yashiro, was soon regarded as not behaving as Japanese as it refused to supply new loans to dead-beat companies and instead preferred to put the bad loans (as under its agreement with the government) back to the government. Although this created all kinds of tensions with the government, Shinsei eventually showed a profit and a cleaner balance sheet than many of its Japanese rivals.

Tett has produced a well-written, easy-to-understand book, dealing with a major international issue – Japan’s bad loan problem. The final message is that the solution is going to be a painful adjustment in which Japanese banks find a way to assimilate some of the harsh lessons of Anglo-Saxon capitalism, while maintaining some of the traditional Japanese ways of allowing face and form. Change must come. The parable of Shinsei is that the bank “had only succeeded in cleaning up its bad loan book because it had a clear sense of leadership. Moreover, this leadership was willing to endure bitter controversy and short-term pain – and squarely face up the problem.” To this she adds: “Thus far, however, these qualities were still in woefully short supply in Japan…”

What is at stake in all of this is the future of Japan. As Shinsei’s CEO Yashiro proclaimed:

"If we don’t change here in Japan, we will just keep slowly declining as a nation. We have to change our ways of thinking if we want a better future. By avoiding shorter-term pain we just keep creating a longer-term cost. The way we have been dealing with the problems of the last ten years in this country will lead to a continuous decline of this country, not only economically but also politically."

Clearly these are major concerns for Japan in the 21st century. For anyone interested in Japan, Tett’s book is a must-read.