My Busted Bank

Two weeks ago, my bank went belly up.

The November 28th Friday morning edition of the Nihon Keizai newspaper reported that Japan’s Financial Services Agency had found Ashikaga Bank to be in a state of negative net worth as of March 31st, the end of fiscal 2002. The FSA ordered the bank to submit its earnings report for the first half of fiscal 2003 for inspection over the weekend.

I first saw the story in the Saturday edition of The Japan Times as I rode a train to Tokyo. I live in Sano, a city in Tochigi prefecture. Ashikaga Bank is Tochigi’s largest lender with some 5.3 trillion yen ($48.5 billion) in assets. A chunk of those assets were mine, to the tune of 1.75 million yen ($16,000). I have been squirreling away yen for the past year or so in anticipation of a weakening dollar, which is happening right on course. I have a plan to start moving money back to the states when it takes less than 100 yen to buy a dollar. These days, a dollar costs about 108 yen, down from 125 a year ago. With the magic level in sight, I was almost ready to start moving money. Suddenly, my clever currency arbitrage plans appeared to vanish along with my money.

On that lovely Saturday morning train ride, it was not at all clear what would happen to shares of the bank held by investors, nor was it clear that deposits were safe. Everybody I spoke with assured me that they were because, similar to the United States, Japan has a depositors insurance system that protects up to 10 million yen ($93,000). What’s more, spokesmen for the government said that the point of national intervention at Ashikaga Bank was to insure that the regional leader didn’t collapse, thereby sending the area into a financial panic. Seizing the bank and freezing all assets would hardly accomplish the goal of maintaining confidence in Tochigi’s banking system. So I could breathe a sigh of relief.

Over the weekend, the government reviewed the bank’s books and found that there were far more problem loans than previously disclosed and that the bank was insolvent. On Monday, Dec. 1st, the government invoked Article 102 of the Deposit Insurance Law, thus protecting deposits with the aforementioned insurance, and then wiped out all shareholder capital by taking a 100 percent equity stake. Ashikaga Bank was nationalized, and people began calling it “Nihon Ginko,” the Bank of Japan.

None of this harmed a single yen of mine. I could still go to the ATM as ever, still go to the bank and wait for a teller, still deposit, withdraw, and pay bills. There was a noticeable heaviness in the air over bank employees, but other than that it was business as usual.

This seemed a bit odd to me. In America, bankrupt banks haven’t been a real issue since the Great Depression. I heard stories from my grandfather and read stories in history books, but for the most part this kind of situation had been a fiction to me. It wasn’t fiction anymore and I felt unsettled. Why was I the only one?

I decided to talk to fellow depositors. Finding them wasn’t difficult. Ashikaga Bank is so prominent in this area that having an account there is similar to living in Los Angeles and having an account at Washington Mutual or Bank of America or Wells Fargo. While not everybody has an account, it is certainly not unusual to have one. My friends with accounts said they didn’t worry because this was old news in Japanese banking. “Banks are bad,” one friend put it bluntly. “That’s why you have more than one account.” I had heard that before, but never quite as loudly as I was hearing it under present circumstances. My informal poll revealed that most people here have three or four separate banks, in addition to an account at the post office financial system which works exactly like a bank except that it’s managed by the post office and therefore considered to be safe.

I came to Japan fully aware of the weak banking system. I knew about the preponderance of bad loans and the absurd practice of propping up zombie companies with bank money. I’m no stranger to the idea of not putting all of one’s eggs in one basket. I, too, have several baskets but a rather large one was at Ashikaga Bank and the near-miss of losing it entirely was no ho-hum experience for me.

My thoughts wandered back to how I ever got to Ashikaga Bank in the first place. My friend, Sayuri (not her real name), worked there. When I first arrived in Sano a year-and-a-half ago, I needed a bank and Sayuri set me up. I then began monitoring the financial situation in Japan and couldn’t help but notice my bank’s name coming up quite a few times whenever there was a story about financial trouble. I regularly asked Sayuri if all was well.

“Oh yes, of course!” she would invariably reply. She noticed that I rarely took money out of my account. I just put money in. “You are saving a lot,” she said once. “This is a good place for that.”

I saw Sayuri on the Wednesday following the nationalization of her bank. “How are you doing?” I asked.

“Terrible,” she said. “We feel such shame. We are using tax money. Our bank is no good.” She wasn’t sure about the future of her job. Another friend with us added to the uncertainty by saying that she heard on TV that all employees would be fired. “Not just management?” Sayuri asked. Nobody knew for sure. Two weeks later, we still don’t know.

While deposits were safe, shares of Ashikaga Bank stock were obliterated when the government took control. In an instant, the value went to zero. I heard from people who had followed advice that had circulated years ago during the height of bank foldings in Japan. It went something like this: Because you can’t trust banks to protect your deposits, convert your money into bank stock instead. If things get iffy, you can always sell the stock and take your cash elsewhere.

This idea never set well with me. Why would shares of a bank that had failed severely enough to threaten deposits boast a safe stock? It would seem that no association with such a bank would be the best policy. No job there, no account there, no shares of the stock. Nonetheless, holding an asset that could be sold under any circumstances was the big appeal of this advice and it managed to convert a lot of cold cash into shares of stock.

Lo and behold, that part about being able to sell the asset under any circumstances proved off the mark. The reverse of the advice unfolded in Ashikaga Bank’s case. Deposits were fine while the stock went to zero. This is where the horror stories are to be found. One family told me they lost 3 million yen ($28,000). Rumor has it that a major local business has been threatened by having lost its holdings in the bank, but I’ve been unable to get a name out of anybody and therefore unable to verify the rumor. I believe it, though, because almost all rumors here are true and shares of Ashikaga Bank were a common investment.

A business losing assets on a balance sheet is one thing. A family losing retirement savings or college money is another. Two days after the nationalization of the bank, a father walked to a railroad crossing near my apartment and lay his body across the tracks. The train zoomed through the crossing on schedule, but was delayed by 50 minutes after running over the man. The custom in such cases is to charge the man’s family for tickets refunded to commuters. This tab is usually very high because the commuters affected are not just the ones on the suicide train, but also the ones on the train behind it and the one behind that and so on. In this case, the family received a bill for 10 million yen ($93,000).

Officially, nobody knows why the man killed himself. Unofficially, people acknowledge that the timing was interesting. There’s a hole in my research because I couldn’t find it in myself to visit the widow shortly after she received news of her husband’s death along with a $93,000 bill from Japan Railways and ask if her family had happened to own now-worthless shares of Ashikaga Bank.

If there’s a good side to any of this busted bank business, it has to be that Japan’s financial circus is finally patching the holes in the tent. Earlier this year, the government injected 2 trillion yen ($18.5 billion) into Resona Bank, the fifth-largest in the country. Last month Mizuho Financial Group, the largest bank in the world, decided to sell its headquarters in Tokyo to raise between 300 million and 400 million yen ($2.8 billion to $3.7 billion). The proceeds will go toward booking loan-loss charges and disposing of bad loans, a process that most Japanese banks claim to be doing.

With the latest sign being the nationalization of Ashikaga Bank, there’s ample evidence that the government and bank managers are getting serious about streamlining Japanese banking. There’s trickling evidence that the steps being taken are working. Bad loan disposals are nearly complete at Mitsubishi Tokyo Financial Group, for instance. As the economy gains footing and share prices rise, balance sheets will improve. Banks are transitioning away from slim-margin big business lending to fat-margin consumer and mortgage lending.

Perhaps the shining star of Japan’s bank reform is Shinsei Bank. It used to be called Long-Term Credit Bank until it was taken over by New York-based Ripplewood Holdings and renamed. The Americans said they planned to stop helping debtors who could not repay their loans, an idea whose time has come if ever there was one. The bad debts totaled 1.9 trillion yen ($17.5 billion). The government helped by assuming much of the debt while Shinsei disposed of the rest and shifted away from corporate lending. The plan worked. For the fiscal year ending in March, the bank is on track to report net earnings of 65 billion yen ($600 million) with capital equaling 20% of assets. The typical figure is 10% for Japan’s big banks. Shinsei Chairman Masamoto Yashiro says that the worst is behind us for Japanese bank non-performing loans.

While the failure of Ashikaga Bank might be good for Japan’s banking system, there was still the small matter of what to do with my money. It was clearly safe at Ashikaga Bank, now under the auspices of the Japanese government. But I didn’t want to keep my account there if for no other reason than being angry at Ashikaga’s management for not doing what Shinsei’s management is doing.

Yesterday I visited Sayuri at my branch. She was always my personal contact at the bank, sitting at a desk away from the row of tellers and personally helping me whenever I came in. I rarely waited in line, thanks to her. I said that I wanted to close my account and take the proceeds to the post office banking system.

“I’m sad,” she said.

“I know. The situation is sad. I’ll miss seeing you here.”

She hustled around the sea of beige desks behind the counter, processing my request. I sat back and watched the failed bank in operation. The expressionless men still hunched over their papers, navy or gray suit coats draped on their identical beige chair backs. The women ran here and there in Pepto-Bismol colored uniforms. The head manager still sat kinglike at the back as if nothing had happened. There’s the problem, I thought. Spineless lumps like him were taken out for sake and karaoke by the presidents of failed businesses to be persuaded to keep them on Ashikaga Bank life support. In the 14 years since Japan’s economic bubble popped, the man had not gotten around to saying no to enough of those presidents. I couldn’t wait to read the list of heads that rolled from the government takeover.

I watched a customer hand a stack of bills to a teller. It reminded me of the many fees that Ashikaga Bank had charged me for routine transactions like paying a bill. They charged me 500 yen to pay my monthly apartment rent. That’s a bowl of ramen. I couldn’t write a check. I couldn’t charge it. I had no choice but to throw 500 yen at the irresponsible mess in front of me. The longer I sat, the more I realized that the only thing I had ever liked about Ashikaga Bank was Sayuri.

She returned to her desk with my money and escorted me to a counting room. I counted the cash while she served tea on wooden coasters, a custom normally reserved for people bringing new business to the bank, not for people taking business away. We put the bundle in an envelope and the envelope in my briefcase. She urged me to take good care between the bank and the post office. I assured her that I would.

“This bank is one hundred years old,” she told me.

“Is that right?”

“Much history here. What will happen?”

“I don’t know. What I do know is that you will be my friend no matter where I bank.” I wished I had brought her a present.

“Thank you.”

I walked quickly to the car and drove to the post office.

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