Some debtors are more recalcitrant than others. A bank is unlikely to clean its balance sheet of non-performing loans if the borrower is willing to murder its executives.
This could be the problem that many Japanese banks struggling with a decade's worth of NPLs face, according to Velisarios Kattoulas, visiting professor at a Tokyo branch of Philadelphia-based Temple University, who made his remarks to a gathering at the Asia Society in Hong Kong.
In the Bubble-era 1980s, the main source of lending for Japanese banks - blue chips such as Toyota and Sony - found their credit was good enough to raise finances more cheaply via international bond markets than from bank loans. Bank managers, used to taking direction from bureaucrats, couldn't figure out where to turn. So they approached gangsters with outlandish Ponzi schemes on real estate.
Yakuza groups had no desire to own property but were happy to buy it with bank loans, watch the values double in a few months, and flip it to other gangsters. Once approached, yakuza gangs enthusiastically participated. Banks used this trick to grow their balance sheets to monstrous levels, and enjoyed the commissions on turnover. The Bubble burst in 1989 when the government passed regulations to cool this activity. When it no longer became possible to flip real estate, the underworld community was left holding a lot of golf courses and property developments at a tenth the price they paid for them. Kattoulas estimates gangsters today owe $400 billion to banks, and that half of Japan's indebted companies have ties to yakuza or are controlled by yakuza.
This of course happened throughout the legitimate corporate world as well. But negotiating with gangsters is an oxymoron. The crime bosses were outraged at being stuck with dud property and have for a decade refused to hand over the assets. Kattoulas says that at least two bank executives have been murdered in connection with attempts by banks to reclaim these assets.
Needless to say, the banks haven't pressed the matter.
Kattoulas says this scenario has leaked out over the past five years anecdotally from American financial institutions that have tried to acquire distressed assets. He says an executive at one US investment bank told him that it conducted due diligence on a sports club in Tokyo and discovered it was a yakuza money laundering centre. Kattoulas says a second US investment bank looking to acquire a golf course in the suburbs learned it was an illegal mah-jong parlour for yakuza members. Last, he says recently a US banker told him that a rural Japanese bank that was an investment opportunity turned out to have 80% of its $1 billion loan book stuck with yakuza-controlled or influenced companies.
The knot of yakuza loans worsened Japan's 'lost decade' because it was one factor prompting banks to stop lending after 1993, creating a credit crunch, Kattoulas says. This same credit crunch led to the 1997 Asian financial crisis when banks refused to roll over loans to Asian borrowers.
According to this view, Japan cannot ameliorate its financial malaise without addressing the ties between banks and gangsters. One could even suggest that until the yakuza gangs restructure themselves, broader financial health is an impossibility. Ironically, the yakuza may be among Japan's most aggressive restructuring organizations, says Kattoulas. He says they have consolidated into three major groups and are shedding staff, outsourcing non-core businesses to Chinese and Brazilian gangs, and reallocating resources to more profitable enterprises such as pushing drugs to teenagers.
Moreover a political solution is unlikely, because gangsters also have close ties with many members of the ruling Liberal Democratic Party, particularly those from the far right. Junichiro Koizumi's predecessor as prime minister, Yoshiro Mori, caused scandal (one of several during his short reign) by being photographed in an Osaka bar with a mob boss. Gangsters play key roles in bribing voters in some prefectures to vote for LDP incumbents (although Kattoulas adds some LDP members are clean of gangster ties).
And the yakuza likes to promote itself as a benefit to society. Yakuza origins date to the Edo period, when proto-gangsters provided local protection against marauding ex-samurai. Since then they have fulfilled a police role by keeping down petty crime, and in 1996's Kobe earthquake disaster, proved more effective than the government in providing relief.
So aside from helping bankrupt the nation, promoting drug use, increasing violence, encouraging teenage biker gangs to crime and threatening any LDP politicians who consider apologizing to wartime comfort women, the yakuza are a really terrific bunch. Unfortunately, thanks to greedy banks in Japan's Bubble era, they are at the heart of the nation's economic decline.
