CENTER ON JAPANESE ECONOMY AND BUSINESS PROGRAM ON ALTERNATIVE INVESTMENTS

RESTRUCTURING DISTRESSED COMPANIES IN JAPAN

he Program on Alternative Investments, under the aegis of the Center on Japanese T Economy and Business and in cooperation with the Center for Japanese Legal Studies and the Japan Business Association of Columbia University, presented “Restructuring Distressed Companies in Japan” on November 20, 2003. The symposium featured Richard A. Gitlin, Chairman of Gitlin & Company; and William Seidman, Chief Commentator of CNBC and former Chairman of the Federal Deposit Insurance Company (FDIC) as well as former Chairman of the Resolution Trust Company (RTC). Commenting were Curtis Milhaupt, Fuyo Professor of Law at Columbia School of Law, who also serves as Director of the Center for Japanese Legal Studies; and Robert Fallon, currently a professional fellow at the Center on Japanese Economy and Business. Professor Hugh Patrick, Director of the Center on Japanese Economy and Business, moderated the discussion. Mr. Gitlin began with an analysis of the sys- temic structure, policies, and reservoir of political will necessary for successfully restructuring distressed companies in Japan. He discussed the three factors in light of recent developments, arguing there is reason to be more optimistic about the process of corporate restructuring in the near future. Other panelists were more cautiously optimistic, agreeing that there had been a number of favorable changes in Japan’s institutions and policies of corporate restructuring. Mr. Seidman enumerated several stumbling blocks, linking current institutional problems to those that confronted prior reforms. Curtis Milhaupt cautioned that microeconomic factors affecting restructuring are not as favorable as the new institutional framework for restructuring. Mr. Fallon recounted his own experience in restructuring as a practitioner with an American financial concern working in Japan. Excerpts of the discussion are presented in this report, together with portions of the ensuing Q & A period.

The Program on Alternative Investments analyzes several major alternative asset classes—including hedge fund, private equity, and real estate—in Japan and elsewhere in East Asia. The Program meets its substantive goals through a combination of research projects and seminar presentations by leading practitioners in each of the alternative asset classes, under the direction of Dr. Mark Mason. For a schedule of upcoming seminars and other Program activities, consult the Program’s Web site at http://www.gsb.columbia.edu/japan/alternatives. Dr. Mason can be contacted by e-mail at [email protected].

Lead Sponsors: Nomura Securities Co., Ltd.; Daido Life Insurance Company 2 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 3

It does not matter if there are policies and it does not matter if

the system is in place. If there is no political will in a country

RESTRUCTURING to make it happen, it does not happen. —Richard Gitlin DISTRESSED COMPANIES IN JAPAN

November 20, 2003

Panelists from left to right: Curtis Milhaupt, Robert Fallon, Richard Gitlin, William Seidman, and Hugh Patrick

Prospects and Problems of I believe those three components every time a big case was filed, The second factor is the Financial going to change your top manage- Restructuring have come together in Japan, not an independent trustee had to be Supervisory Agency. The FSA, which ment.” Recently, they asked the

RICHARD GITLIN perfectly, but enough to ignite the appointed. Sometimes that is not the is the bank regulatory body, has banks to provide more detailed Chairman of Gitlin & Company process of corporate restructuring in best thing. Sometimes you want to tightened its approach to banks. information on their deferred tax What signs should you look for to Japan, and I would like to tell you keep the management, particularly if Over the years, all of us have been asset, which is an asset that all of make a determination that a country why. they were not at fault. They modified very frustrated that the FSA has not us question as support for capital is ready to fix its banks and corpora- that now, so they can appoint the been as hard as we would like in its in the banks in Japan, an act that There are eight factors. The first is tions that are in trouble? I have found management as trustee—a very inspections and its demands to see clearly sets the target of putting the legal infrastructure. Japan has that it happens in a country when three significant development. that the banks wrote down their non- much more pressure on the banks put in place one of the best legal things converge. The first is the law. performing loans (NPLs) to an appro- on that particular issue. infrastructures in the world to sup- In Japan, there are very reliable The fundamental question is, is there priate value and set strategies to port corporate restructuring. The courts, good judges, and a good I had been told by the FSA that they a system in place adequate to support make profits. This last year, the FSA law they put in place for corporate group of professionals, albeit too were going to tighten their special restructuring? The second is policy: issued an order that the banks have rehabilitation in April 2003 (the Civil small a group of professionals. inspections about six weeks ago. are there policies in place that unify to reduce their NPLs by 50 percent Rehabilitation Law) is modeled after Fundamentally, however, they do They just announced the results of the actions of the bureaucracy, that the by 2005. I met with some of the our Chapter 11, but it is designed not use the system well yet because the last special inspection. They bureaucracy can understand and make banks recently. They are taking that for Japan. It is practical and it works. they started too late. By the time they looked at 161 companies—24 were clear what they are trying to achieve? quite seriously. The FSA has also Thousands of cases have been start, most of the value is squeezed downgraded from the position they The third, and probably the most issued an order to the 15 banks that conducted under that law since it out of the companies. However, were in six months before. The FSA important, is political will. It does not got funds from the government that was adopted. The Corporate Reorg- there is now a system in place in did what it said it was going to do. matter if there are policies and it does says, “First, you have to tell us what anization Law was also modified. Japan that can support corporate not matter if the system is in place. If profits you’re going to make and we The third factor is the IRCJ (Industrial That is a law for big cases, and what restructuring and support it quite there is no political will in a country must pass judgment on that plan, and Rehabilitation Corporation of Japan), happened in the old days was that well. to make it happen, it does not happen. if you don’t make those profits, we’re which has US$83 billion to buy 4 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 5

minority bank debt and help fix Fifth, foreign strategic and international viable companies. In the first four investors have focused on Japan. cases of the IRCJ, they did valuations If you watch the Resona situation, that caused many banks to signifi- when the government came in and cantly write down the value of their put money in Resona Bank, the stock I do believe we are no longer talking about the direction, but the debt over and above their reserve market went up in value. I believe pace of change. —Richard Gitlin value. There was good news and bad the value increases of the banks and news. The good news is it is the first the banking system, as a result of the time an independent government stock market increase, far exceeded

agency has done a valuation in com- the amount of money the govern- Richard Gitlin parison to what the banks had been ment put in to fix Resona. doing in valuation. The bad news for You can argue whether or not you is both a thought leader and an Japan has mustered the political I thought that one sentence from agement expert. A year ago, no one the IRCJ is that they need the banks should leave stockholders in place action leader on items that deal with will to begin the process of corporate Governor Fukui’s October 1 speech knew the name. Now, they believe to come to them voluntarily for cases when you put that amount of money this topic. Well before he knew he and bank restructuring. Before the was quite telling. He said, “It’s vital more and more resources are going and that action really dried up the in place, but regardless, a strong would be governor, he was abun- recent election, Prime Minister for management of both the compa- to be devoted to actually fixing busi- supply. Still, it is very significant to message was received. There is a dantly curious how corporate restruc- Koizumi was selected to lead the nies and banks to become aware of nesses in Japan, creating a serious have independent valuation from the disproportionate appetite out there turing would fit with monetary and party. Significantly, he reappointed the urgency of corporate revitaliza- demand for talent to help. IRCJ on the discounted future cash among investors looking for the right fiscal policy, how it fit in the fix of Minister Takenaka and there was a tion through effective dialogue and flow method as a means of compari- I do not believe there has been a signs in Japan. There are strategic Japan, and he was willing to devote lot of political negotiation to try to adequate speed and decisiveness.” son to looking at the banks’ reserve radical change in Japan, where there investors whom I talk to frequently time to understand this. stop that from happening. What The Governor is doing his best to set policies. was no restructuring yesterday and who are global players and they can- was significant in this election was some insight and direction regarding Seventh, Minister Takenaka of the there will be huge restructuring Fourth, the Ministry of Economy, not seem to get their hands on the that the LDP (Liberal Democratic what should happen in this area. FSA said something six weeks ago tomorrow. Still, I do believe we are Trade and Industry (METI) is focusing appropriate assets in Japan. There are Party) did not win control. Without in a policy statement that was very Finally, the language has changed no longer talking about the direction, rather intently on each overcapacity fund investors, and many are under- a coalition, it would be harder significant in terms of his thinking in Japan. If you go to Japan now but the pace of change. My guess is industry in Japan to make a determi- weighted in Japan. They want to for Koizumi to pursue the reforms regarding the banks. He said, “We and talk to people about corporate the next twelve months will see a nation as to what they can do to fix change that, so they are looking for necessary for corporate restructuring. want the banks to really fix compa- restructuring, people are going to very significant acceleration. the problem. signals. Japan has a real asset in the If the LDP were the sole power, nies. We don’t want any more tem- talk to you about prepackaged deals. disproportionate interest of the for- the elders of the party would have WILLIAM SEIDMAN Furthermore, METI has taken a porary fixes.” That is very significant A year ago, no one talked about eign investment community to invest a little more leverage, but when Chief Commentator of CNBC-TV, very proactive position on corporate because a year ago, if you asked prepackaged deals. People are going Former Chairman of the FDIC, in Japan. Hopefully, they can harness Koizumi has to answer to a third restructuring. They were the ones someone in Japan, “What is restruc- to talk to you about the study on Former Chairman of the RTC that very wisely. party, he has the power now to look who funded our turnaround manage- turing?” they would tell you, DIP (debtor-in-possession) financing: I have made a little list of all the to the elders and say, “If I don’t ment programs. When Laura Resnikoff The sixth factor is Governor Fukui of “Reducing the debt of a company.” How do we get financing earlier? reasons that were given to me by demonstrate reform, we’re going to of Columbia went to Japan to give the Bank of Japan, who is an advo- That was basically the accepted People are going to talk to you about the government, by the banks, and lose ground.” Anything that gives a talk, it was METI who provided cate of corporate restructuring. His definition of restructuring in Japan. fixing viable companies. No one so forth, explaining why the kind of Koizumi and Takenaka more political the funds for her to go. They are mission in life is monetary policy, That does not fix a company. You talked about fixing viable companies restructuring that Richard and I pro- power is a positive thing for reform trying to be a driving force for but he is an advocate of corporate fix a company by fixing the business, twelve months ago. Everybody in posed, based on the American expe- in Japan. corporate restructuring in Japan. restructuring, and that makes a big and then you adjust the balance Japan has become a turnaround man- rience, would not happen in Japan. difference because the Bank of Japan sheet to fix the business strategy. 6 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 7

The first is that the economy is too I heard Richard’s speech before when Now, we have the restructuring the fair market value is far lower about being too optimistic about weak: You had a strong economy; he was in Japan and was tremen- organization with funding, with a than the banks think it is, even after what has happened. we have a weak economy. dously encouraged and I still am very good, strong staff that could they have done all this writing down. Richard is right; the environment is encouraged. Still, let me give you a restructure many things, but they As a result, the banks do not want to Second: You had an infrastructure for changing. Still, while Fukui is a little little of my experience after I heard have not been able to get a single transfer to this organization. The bor- doing these things; we do not. better than his predecessor, this his speech. asset from the banks out of the rowers do not want to get into the predecessor was totally in favor of Third: Our banks are much weaker Keep an eye on the IRCJ. original ones that were ordered out. hands of a really ruthless “American- If you talk to the people who are restructuring.. The problem that than your banks were. I said, “What’s the problem with fair style” restructurer. running the Resolution and Collection Takenaka has is that when Koizumi When you see the banks market value? Hire a couple of peo- Fourth: There is a cultural bar against Corporation (RCC), they are terribly So, nothing has happened. That does listed the priorities for his new regime, ple; have them determine what fair treating people the way you have discouraged. They do not have any- transferring assets to that not mean things will not happen, but he no longer even listed the bad debts market value is.” The banks will not treated them in the United States. thing to do; nobody is giving them I look at the RCC, which essentially in the banks as one of the top three agency, you will know that do that. What is the real problem? In other words: We are not going any property. The reason is that the did nothing for five years because of priorities. Yet, Koizumi is a brilliant The restructuring organization thinks to treat people the way you have banks and the RCC could not agree. things are starting to move. this problem, and then I go to this politician. I wrote a piece six months treated them in the United States, Under the law, the banks are sup- new organization that is really ago that said he is doing better than —William Seidman throwing thousands out of work posed to sell assets to them at fair equipped, and the same problem is you think, because in each of the and all the other nasty things you market value. Not surprisingly, they in effect. I then suggested to them, key areas that he has lined up, he have to do. could not agree on fair market value, “Why don’t you have a new way to has made some progress, but he has and so they never got any assets do this? Create a joint venture with not pushed hard enough to commit Fifth: We are in political gridlock. except short-term loans to business, I am more optimistic than these banks. Put these assets in; suicide the way Hashimoto did, when Koizumi has to have a coalition particularly small business. They you won’t have to write them down he really went in and tore things up. and his own party does not really in the past, but I do not were not giving them enough then.” The problem is the banks are approve of most of what he is doing. We will make progress in the banks. money, and they were telling them think you are going to see still dicey on capital. The accounting However, although it will be better Sixth: We have weak regulators who they would have to change. At the rules could be made such that you since. We can’t agree with the banks any huge change until than perhaps it was last year, it is simply are not used to taking the same time, the bank was saying, do not have to take any losses until on fair market value. The banks are still going to be a very, very long- kind of regulatory actions that you “We only want to give people money the final liquidation of your invest- supposed to transfer these assets somebody decides what fair term process. I am more optimistic took, and we have a real fear of for- who will pay us back.” The regula- ment; then the banks will take the to the restructuring organization at than in the past, but I do not think eign ownership. We do not want to tors told them, “That is not your first market value means. Then losses, but by then the banks will fair market value.” you are going to see any huge do this so that Japan ends up with obligation. Your first obligation is presumably be okay. you will begin to see a very change until somebody decides what major foreign ownership, particularly to take care of people who are in Where did I hear that before? At the That may be a bad idea, but it fair market value means. Then you of the banks. We also have a great trouble.” RCC for five or six years and they rapid increase in the addresses a problem that has will begin to see a very rapid fear that if we really restructure, never did agree. I gave a speech After I heard Richard’s speech, I was restructuring. been part of this whole restructuring increase in the restructuring. somebody will make a lot of money, to the Diet in which I said, “Unless delighted. I thought I could go back issue since we first looked at it. and we do not want anyone to make you find some way to break this CURTIS MILHAUPT and all of these problems I listed —William Seidman Will that change? Keep an eye on a lot of money. We do not want to deadlock over fair market value, Fuyo Professor of Law; Director, would have disappeared. I went to the IRCJ. When you see the banks Center for Japanese Legal Studies, have what happened to your coun- nothing is going to happen. I gave the IRCJ and they said, “We don’t transferring assets to that agency, Columbia School of Law try, where several people made real that speech two or three years ago. have any assets to work with. We you will know that things are starting Richard set up my comment wonder- fortunes and our legal system is not Unfortunately, I was right and noth- were given four [companies] to begin to move. Until then, be cautious fully when he said that the new legal equipped to handle the problems. ing happened. with and there hasn’t been another 8 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 9

what we are seeing is a reappearance a firm with a failed business model of the planned industrial reorganiza- must face its day of reckoning. tion one saw in the 1970s in Japan. Across large sectors of the Japanese That was another time when you saw economy—retail, construction, etc.— My hypothesis is that while the reforms have been excellent, they offer mean- the sprouting of a mushroom-like one does not see a lot of going con- ingful options to a very small percentage of currently troubled firms. growth of depressed industry statutes, cern value that can be preserved. special cartels, and government-directed —Curtis Milhaupt It is interesting to contrast Chapter 11 revitalization schemes that probably practice in the United States today. A did not make much economic sense recent study by some very prominent Curtis Milhaupt but may have made political sense. bankruptcy scholars in the United I throw that out for comment. Are we States suggests that in the United witnessing a kind of reemergence of regime in Japan is excellent, but been overused. Again, if you do of a host of other options, including and the IRCJ has only handled about States, Chapter 11 is not used to industrial policy where the bureau- firms come into the process too late, not have sophisticated contractual the IRCJ that Bill has talked about, half a dozen cases so far. Why are preserve going concern value in crats control everything? How healthy by which time most of the value has mechanisms to give assurances to principles for out-of-court workouts firms not making use of this great, the way that we used to think of it. are the rehabilitated firms? been squeezed out of the company. a creditor that they are going to and special bankruptcy regimes for new regime? It is a place where firms are put on I want to begin by stepping back and be paid back, they will seek other banks and other institutions. There Other categories of reasons why the auction block. Assets are taken Maybe there are too many options explaining how the prior legal system forms of assurance—forms that are is now a large menu of very good more firms might not be entering the offline, managers lose their jobs, now. If you parse through this contributed to that problem. blunter in terms of alerting creditors options for troubled firms in Japan. new rehabilitation regime are culture, plants are sent overseas, etc. regime, there are conflicting incen- to potential problems. politics, and economics. I want to First are poor contracting practices. Not surprisingly, the new regime has tives for firms. Why use the Civil My sense is that Japanese do not focus on a latent theme in the discus- Japanese lenders have tended to lend Second, prior to the reforms discussed drawn a lot of praise. One scholar Rehabilitation Law if you can use the have that image of corporate restruc- sion, which is that perhaps it is too on the basis of collateral, namely real by Richard Gitlin, Japan had a very compared the amount of time it takes METI-sponsored Industrial Revitalization turing. They see it as a place where late to revitalize many firms in Japan. estate, and have not looked to the complex, opaque, and inefficient firms to go through the civil rehabili- Act and get tax credits and other creditors get together, everyone takes All of these regimes presume going underlying cash flow or the business bankruptcy regime and virtually no tation process in Japan today versus benefits from the government with- a little haircut, and the firm is turned concern value on the part of firms. model of the firm in making loans. experts in that regime. This com- Chapter 11 in the United States in the out the stigma of entering a formal back out into the world, even if it Maybe there is no going concern Contracting practices reinforce this. pounded the hesitancy to make 1980s, a time of financial difficulty legal procedure? lacks a viable business model. value left. They have entered the use of this framework. for U.S. firms. He finds that firms Japanese credit documentation is It is interesting to note that all this process too late; they have failed My hypothesis is that while the are emerging in Japan faster than very slim, very rudimentary. One As Richard told you, there has been reform has been piecemeal, one business plans, and so there is noth- reforms have been excellent, they American firms were emerging in does not find financial covenants massive reform in this area, and statute at a time, as opposed to a ing to be preserved. These assets offer meaningful options to a very the 1980s and concludes that Japan even of the most basic sort in these Japan now has one of the most comprehensive overhaul creating a need to be liquidated or sold off. small percentage of currently trou- has a quite effective legal system. documents, yet these covenants extensive and best formal bankruptcy unified regime. I still do not under- bled firms. What is really needed You might retort that one thing serve as a device for alerting credi- regimes in the world. Richard has For me, this raises a question. If the stand the IRCJ’s reason for being. is a change in creditor mentality. Japanese firms have in spades are tors that problems may be starting discussed the Civil Rehabilitation new system is so good, why are not Why couldn’t the market do every- You need better exit options in valuable relationships and that these with a borrower. Without those, Law, which to my mind is one of the more firms using it? Civil rehabilita- thing that the IRCJ is doing? If the Japan, more liquid markets for assets deserve to be preserved. I agree that lenders are forced to fall back on more important pieces of this new tion law filings are still only about market cannot find fair market value and human capital. Zombies do not replacing these relationships would collateral. Notes and IOUs have been restructuring regime. There have 5 percent of total bankruptcy filings. for firms, what can a government need to be brought back to life; they be costly, but if they are attached very prevalent in trade financing in also been changes in the corporate Out-of-court workouts have been agency add? Some Japanese scholars have to be dismembered. We will not to a failed business plan, they have Japan; personal guarantees have reorganization law and the creation used only about a dozen times, and observers have suggested that see real changes in Japan until that no going concern value. Ultimately, 10 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 11

pain is dispensed. This rehabilitation We tried to get Hachijuni to see it Fast forward nine months later. I was cial information to determine a valua- as maintaining the listing on the tions, their role was more form than regime is a good start, but it does not needed to take some drastic action to having lunch with the international tion for Chinon’s assets. What we Tokyo Stock Exchange, but we substance. The Hachijuni bankers take us all the way. remedy the NPL problem of Chinon treasurer of Kodak. We were good discovered, not unsurprisingly, was persevered. made the key decisions. The Chinon Industries. Like other Japanese banks friends and he, at that time in 1997, that Chinon had negative cash flow. executives were always scrupulously ROBERT FALLON The upshot of these innumerable confronting troubled credits, they had was saying, “We at Kodak are worried This would lead the price negotiation consulted but invariably agreed with Professional Fellow, Center on negotiations was the realization by Japanese Economy and Business about the advent of digital photography toward a purchase of assets, but the bank’s decision. I was with Chase Manhattan Bank in because ultimately it will cannibalize Hachijuni insisted, “Chinon must Ultimately, the four major obstacles Tokyo, and Chase had a very big the sales of film and we’re a film remain a public company.” were addressed. Chinon was split business in Japan, particularly with company, not a camera company. So, we faced several problems: (1) into two parts, but before we did financial institutions. One of the This is where we have to become Hachijuni wanted to keep Chinon as that, we went to the Tokyo Stock regional banks in Nagano prefecture, more competitive.” I said, “Funny you Restructuring in Japan does a public company. (This was impor- There is a tendency in restruc- Exchange and applied to do a reverse Hachijuni Bank, was a main client should say that. I know a bank in tant for face reasons.) (2) Chinon had split. This is where you shrink the who had asked for some advice happen, but one must be Japan with a client, a Japanese camera turing for denial. People find negative cash flow. (This caused number of shares outstanding, which about securitization because the bank company, that is failing. Kodak might prepared to deal with issues Kodak not to want the manufacturing it hard to accept the reality theoretically increases the price, but had some NPL problems to address. consider an acquisition.” He said, business, only the camera design and we also applied to the Tokyo Stock that do not necessarily arise “That’s not a bad idea.” of difficult decisions. This is We brought them down from Nagano lens business.) (3) As a result of Exchange to reduce the par value. In Ultimately I made a trip up to Nagano Kodak’s desire not to acquire the effect, we wiped out a great majority to Tokyo and had them sit through a in the United States. Issues not uniquely Japnese; it is a day of technical discussion on securi- and met with Hachijuni to present manufacturing assets of Chinon, the of the shareholder book value in tization, only to realize that they had of face, decision-making, Chase’s idea that a major U.S. company company would inevitably need to human trait. But in Japan, order to align the market and book some real problems in terms of their might be interested in buying Chinon lay off manufacturing workers or find values. This was important if Kodak and timing can take on a denial can persist beyond a NPL portfolio. One particular prob- Industries. We were encouraged to other uses for their production skills. was to take control of Chinon and lem credit was a Nagano-based man- different hue in Japan. talk further. I knew we had a legiti- (This was a nettlesome issue for Chinon reasonable period. maintain the public listing. It came as ufacturer of lenses, optical devices, mate opportunity, so we negotiated and Hachijuni.) (4) Hachijuni Bank no surprise that Hachijuni was one of and cameras called Chinon Industries. —Robert Fallon an M&A mandate with Kodak to would need to take a haircut on its —Robert Fallon the major shareholders who took a represent them in the possible acqui- Chinon debt to make the transaction significant haircut on their equity Chinon was a public company in sition of Chinon Industries. work. (This would further deplete holding. The bank also agreed to Japan trading on the Tokyo Stock the bank’s already thin capital.) write off a substantial portion of its Exchange. The company was well Armed with this mandate, a Chase Chinon debt as a precondition for known for its lens technology and team went back to Hachijuni to With these obstacles, we left this Kodak to tender for Chinon shares. had a reasonable brand name in kept advancing money, in order to outline an acquisition proposal and particular series of meetings feeling Hachijuni Bank that there was no cameras. But despite its technology, keep Chinon solvent. But this tactic, ask for an introduction to Chinon. that a Chinon deal was unlikely. But, Simultaneous with the tender offer other way out of the box. Chinon the company was a victim of brutal keeping a borrower alive, is really The Hachijuni principals responded, as happens in Japan, sometimes you and Kodak taking control of the was not coming back to financial competition from other Japanese not in the best interest of any bank, “You can negotiate with us. Later on, have to let things percolate slowly. company, the board voted to split health and the bank’s only alternative camera manufacturers, such as for it depletes the bank’s capital and you can talk to Chinon.” Chinon into old Chinon and new Kodak was patient and we went to realize some value for its non- Canon, Nikon, and Olympus. Chinon prolongs resolution of the NPL in Chinon. New Chinon assumed the This is not unusual in Japan, where through a protracted negotiation performing loans was to engineer a had beautiful facilities out in Nagano question. manufacturing assets and with that, the main bank exercises tremendous that lasted almost two years. It was sale of whatever Chinon assets they prefecture and competent assembly the majority of the people. New Hachijuni understood the message influence over its corporate client. tedious and complex. There were could to Kodak. Though Chinon lines making cameras. They just did Chinon was a private company but did not really want to react to it. We understood that reality and dealt multiple issues to deal with, such principals attended the key negotia- not make any money. essentially controlled by Hachijuni only with Hachijuni, reviewing finan- 12 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 13

Bank. Old Chinon remained a public At the end of the day, Hachijuni Bank company, controlled by Kodak. ended up writing off about three- It was now viable because it had a quarters of their debt, but they saved substantially reduced expense base face. To them, it was important that and a decent revenue stream from Chinon continue as a public company The bank has much more say than the corporation. That is a truism in Japan. producing lenses and digital camera even though Kodak had control. This —Robert Fallon prototypes for its major shareholder, required much painstaking negotia- Kodak. Some debt was allowed to tion, but it was important to Hachijuni stay with the old Chinon. It was and thus critical to the deal.

about 35 percent of the original Robert Fallon For its part, Kodak manifested tremen- Chinon debt, but it was enough to dous patience and cultural sensitivity. keep Hachijuni happy. Ultimately, Two years down the road, it achieved You will not get anywhere. You have going to find yourself having to over Resona’s NPLs, and we were chair, they negotiate, they find out that debt was paid off by the old its goal, a foothold inside the Japanese to know the main bank involved and renegotiate later on. all debating whether that would the right deal, they make a deal, and Chinon, under Kodak’s stewardship. camera industry from which to launch you have to know the company well. come back with a hard value or a they share equally. There is nothing Lastly, there is a tendency in restruc- As part of the negotiations, Kodak a digital camera initiative. If you do not know the company soft value. We concluded that if it complicated about these out-of-court turing for denial. People find it hard had agreed not to tender for the well, you absolutely need to know came back with a hard value, that principles, but Japan’s banks do not As for the Chinon manufacturing to accept the reality of difficult deci- remaining old Chinon shares for the main bank; otherwise you are was a very optimistic sign. They did follow them. Japan adopted the assets spun off into new Chinon, the sions. This is not uniquely Japanese; a period of time. In this way, not going to get to first base. come back with a hard value that INSOL Principles, but with certain game plan was to become a contract it is a human trait. But in Japan, Hachijuni saved face that Chinon reduced the capital of the bank from amendments. Japan’s banks do not manufacturer. But, as with many small Frankly, if we knew this deal was denial can persist beyond a reason- remained, at least in part and for a 12 percent coverage to a 6 percent share the loss equally. It is one of manufacturers in the Japanese heart- going to take us the better part of able period. The process of working some decent time period, a public coverage, causing significant criticism the fundamental problems of restruc- land, the company fell victim to two years to close, we would have through denial in Japan is more com- company on the TSE. At the end of the Koizumi government about turing in Japan. The main banks have Chinese competition. Even Kodak tripled the fees on Kodak, but plex and protracted because of cul- of two years, Kodak successfully making the investment in the first often taken responsibility for man- sought to manufacture its digital Kodak’s treasurer had the last laugh tural issues. Economic decisions may tendered for the remaining shares, place. The second thing that Resona agement, including putting bankers cameras in China. because he made me cap the fees. be frustrated because other issues of took the company private, and did that is very significant is they into the management. When there is I thought we could move it along face or obligation become paramount. changed the name to Kodak. Kodak Ultimately the manufacturing assets issued a business plan that is almost a problem, the minority banks look faster. has now shifted their entire global of the old Chinon were sold off piece- Corporate restructuring in Japan like an independent bank business at the main bank and say, “Listen, digital camera business to Japan, meal. I suspect most of the people A final lesson is to reemphasize that has been done in the past and will plan to reduce their cost and increase you just about ran the company. which is resident in the rump of involved in that business were either the bank has as much if not more continue in the future. But, as our their profit. These two moves were a You took all this responsibility. old Chinon. laid off or scrambled for other jobs. say about its corporate client than the experience with Chinon illustrated, reflection of independence. Not to be The company went down under corporate client itself. That is a truism it is a custom, not cookie-cutter, busi- overemphasized, these were stakes in your watch; why should we take There is a moral to this story. Another lesson from this experience in Japan, especially when dealing ness that requires cultural familiarity, the ground that are significant from a the same loss that you take?” Restructuring in Japan does happen, is that you need relationships in this with middle-market companies. If patience, and credibility with the directional point of view. but one must be prepared to deal business, more so than in the United Eight out-of-court deals were done you think you are negotiating with main bank. with issues that do not necessarily States. One does not walk in as an The IRCJ, as Curtis mentioned, has in Japan, and then the system broke the corporate entity and you have arise in the United States. Issues of investment banker, without an out- available these INSOL Principles. down because the main banks could not taken time to do your nemawashii, Discussion face, decision-making, and timing going relationship, and say, “Hi, I’m They are global principles for work- not absorb that loss of the minority your preparatory sort of ground Richard Gitlin: When the govern- can take on a different hue in Japan. here to restructure your company.” outs, common sense principles. The banks any more. One of the driving laying with the main bank, you are ment put funds in Resona, an inde- banks get together, the banks elect a forces in creating the IRCJ was that pendent auditor was hired to look 14 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 15

they were to buy out the minority had undisciplined capital. It had capi- Questions and Answers in this game now in Japan. As of a paying too much attention, looking banks and take that equation out of tal that was not related to discipline, Q: What is the role of the private year ago, it was all U.S. money. It at this government institution that is the negotiations. and when you have undisciplined sector? What factors are influencing was Cerberus, it was Lone Star, it was doing very little, or is it being a goad capital, you get undisciplined man- the market for corporate control? Goldman, etc. The players went in for accelerating the process of private The IRCJ could have all the business agement. If a good businessperson early a few years ago, bought assets deals that are being done? If all the in the world today. They could have William Seidman: Some of the walks into a Japanese company for eight cents, sold assets for twelve action is really in the market, that is every bank sending them every case. banks have disposed of a very today with a decent product, they Restructuring, whether it is cents, made early money, and now to say that Japanese banks are nego- All they had to do was value it large part of non-performing assets can improve the profitability very they are in the game for private tiating with foreign investment banks according to the reserves of the in Europe or the Far East, is through negotiations with the private significantly, and, if they add some equity; that has been the switch. to put together a subsidiary to handle banks. They concluded their role was sector. The banks have dealt with the marketing and finance, they can merely a discussion of who workouts in their portfolio, perhaps to help drive the system down to fair private sector. What they have not What has happened in the last improve it more. even invest in others, maybe we are market value. Will that continue or been able to deal with is these major month? Mitsui Capital announced is going to take the losses. misguided in paying too much atten- will they be compromised? Within Japan’s system there are many industries with high employment a billion dollar fund being raised tion to the IRCJ. Perhaps we should —William Seidman companies which, with the discipline where the losses would be huge. to invest in troubled companies. Curtis is right about the law. When really be looking at all these other of management imposed, have the In that area, there has been very Sumitomo-Mitsui is finalizing its deal you have a system of financing small deals in which loans have been opportunity to have much better little movement. with Goldman in a serious effort to and medium businesses based on restructured because when a bank performance. play in the restructuring business. guarantees and collateral, what hap- Richard Gitlin: It is interesting to sells off a portfolio of non-performing JAFCO has announced a 1.4 billion pens? It has no relationship to the William Seidman: Restructuring, watch who is raising money to play loans, it is realizing its value because dollar fund-raising. Institutional ability to produce cash flow. Of whether it is in Europe or the Far that is a market transaction. Maybe Japanese investors, who, six months course, you are going to have prob- East, is merely a discussion of who the market is doing a little better job ago, put little money into this busi- lems if the economy turns. There are is going to take the losses. There are than we realize. ness with few exceptions, now have no fundamentals in the lending. The huge losses. The banks have made group will take the loss. The restruc- a growing appetite to find places to Richard Gitlin: Clearly, too much FSA has recognized that. The FSA has bad loans for whatever reasons, and turing group has one very good prin- Clearly, too much emphasis put their money. People anticipate emphasis is placed on whether the issued a policy statement to change in the end, you have to decide who ciple, which is they will not finance that there will be profits made and IRCJ is successful or not successful. the method of financing small and is going to take those losses—the is placed on whether the any restructuring without new private companies will now be restructured, The IRCJ will find its place in how it medium businesses in Japan. It is shareholders and the borrower, or capital being part of it, so that they and the Japanese community is now fits into Japan’s restructuring. It will leading the effort to change the law the shareholders and the bank, or the IRCJ is successful or not have an indicator out there that what positioning for that. not be the ultimate answer, but it in Japan to improve inventory and government. If you cannot decide they are doing is not just for govern- successful. The IRCJ will find will find its place. In three out of receivable financing and to change that, then you are not going to be Hugh Patrick (R. D. Calkins Professor ment purposes. In the end, Japan is of International Business Emeritus; their first four cases, they handled the way small and medium enterprise able to move ahead with restructuring. its place in how it fits into Director, Center on Japanese Economy still struggling with who is going to the government claim. I believe they (SME) lending is done in Japan. and Business): The battle over fair market value in take the losses, and until they get Japan’s restructuring. It will will evolve quite well to buy out There is, as of yet, no market for cor- Is the value really squeezed out Japan is not because people do not that decided, all the nice things that the minority banks that are a major not be the ultimate answer, porate control. Once that happens, of Japanese companies? Are we know what the fair market value is; we have heard about will not result problem in dealing with Japanese there probably will be a number of just dealing with pieces here? The that determines who is going to take in a lot of action. restructurings, and they will play a but it will find its place. cases, but until we have our first answer is no. Nissan is not a one off. the loss. As Richard has just said, significant role in doing that. successful hostile takeover, we are Nissan’s value went up 300 percent you set the fair market value nice —Richard Gitlin going to see continued negotiations. To me, the creation of the IRCJ was after different management came in. and high so that the bank will give I would like to ask, in response in part a stimulus for the banks to set What happened in Japan is that it you the assets; then the restructuring to “Does the IRCJ matter?” Are we up their own organizations, and it 16 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 17

occurred. I remind you of the which is that borrowers are not paying title of this particular symposium, on the loans. “Restructuring Distressed Companies The first wave of American firms in Japan.” That is why there has been I think China is the reason that Japan is now changing. There is a new export force seeking to clean up the Japanese the focus on this most difficult area, banks included Cerberus, Lone Star, in the world that can put Japan in real trouble. —William Seidman because of the economic and political Goldman Sachs, and Lehman. These difficulty of deciding who is going to firms had distressed loan expertise have to take the losses. The losses and set up distressed loan trading are there in reality; it is just that they operations in Japan around 1997 William Seidman have not been realized in some formal in order to buy portfolios of non- sense. Who is going to take what performing loans. They first bought portion of the loss is what this dilemma will play its role, but in the end, the have to get a decision on who is are effectively two. I can name ten for optimism, the major banks have from Long Term Credit Bank, Nippon is all about, as Bill has pointed out market will fix Japan. The government going to determine who is going to industries where there is similar raised major capital, many from Credit Bank, Hokkaido Takeshoku, so strongly. will stimulate, will use the IRCJ, will take the loss. In the United States we improvement in industry structure. foreign capital. Eventually, that will and Tokyo Sowa Bank, the banks do other things, but eventually the had that absolute power, and we had Will this corporate improvement impact float all ships up. I am optimistic that Q: What does Japan want out of this that were basically busted because market will fix Japan. Looking at the power to look at an enterprise in any way the distressed end of the Japan’s economy is restructuring, restructuring exercise? there was no alternative to raise capi- the IRCJ and making a judgment as and say, “This one is dead, liquidate market that you all are addressing? particularly that 70 percent of that is tal. They were insolvent beyond the Robert Fallon: The problem with to where it is, and using that as a it. This one has potential, we’ll see in the low-productivity area. denial stage. The American distressed William Seidman: There are two Japan’s decade of deflation is that judgment to where restructuring is if we can restructure it.” That is what debt specialists set up servicing oper- Japans: there is the export Japan, Robert Fallon: While we all talk the banking sector was not healthy. in Japan, is probably too narrow. is missing. ations where, bit by bit, loan by loan, which has always been highly effi- about the law, more restructuring is Banks are a quasi-utility. They are they sent out collection people, fore- Curtis Milhaupt: I think you could Q: Look at the TSE-1, the 1,500 cient, subject to extreme competition, taking place within companies than intermediaries between those that closed on collateral, negotiated with have improved the ability of the IRCJ largest companies, ex-financials in and not a part of this problem. This anybody realizes. What is even more have money and those that need borrowers such as small- to medium- if they had the right to go into a Japan. Over the last five years, the problem is almost solely the domestic significant is that if you take a hard money. If the banks are broken, it is sized manufacturers and entrepreneurs, bank and say, “We will take over this operating margins in these compa- economy, where they have had a look at the companies you just men- very hard to get capital circulating and ultimately realized liquidity from particular credit on your behalf and nies have more than doubled; they noncompetitive, government-regulated tioned that had increased perform- and engender an economic recovery. these distressed loans in excess of we’ll work it out our way. The banks are generating record free cash flow. industry, and that is about 70 percent ance because of their restructuring, The more the banks propped up the the price they paid. So they earned a have no say in it.” This is very much They are reducing head count; there of the whole economy. If you look there is a lot more that could be zombies, trying to delay having to nice profit. Things started to clear in the way the RTC in the United States is no longer lifetime employment— at productivity figures, Japan in the done. You get a sense of the power deal with the problem, the more they the system. was set up. I could not imagine how it may be expensive, you may have export area is number one or two in of fixing Japan when you consider exacerbated the deflationary spiral. the RTC would have succeeded if it to call it voluntary retirement, but the world. If you look at domestic some of these success stories. They Now, the Japanese themselves have It is the banks that have to be fixed had to voluntarily wait for the S&Ls they can reduce head count. They economy productivity, they are number are not finished yet. You could look restructuring teams, and they are to sustain an economic recovery. to come and say, “Gee, we’ve got are moving production offshore. thirty or thirty-five. That is the part at any one of those companies with going out beyond their own keiretsu Fixing the banks means you have some busted property deals.” They are focusing their business for that is now being restructured and a fresh set of eyes and find ten steps because they see opportunities here. to clean up the non-performing selling non-core assets, and they are I think that is very optimistic. I am you could take to improve profitability. The market is finally beginning to William Seidman: We decided in loans and recap the banks—perhaps being helped by industry consolida- also optimistic about where the clear the non-performing loan portfolio. the United States who was going to Hugh Patrick: I think it is important change their management as well. tion. If you look at the steel sector, Japanese economy is going. When take the loss. Once you get that, all to talk about restructuring in its You cannot do that cleanup unless At the end of the day, what does there used to be six blast furnace that happens, it will certainly help the rest of this is machinery. You broader context because a lot has you attack the underlying problem, Japan want? To fix its banking sector. makers three years ago; now there this problem. If you want to look 18 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 19

If you put healthy banks in the A senior LDP official once asked, we have a higher obligation than the is looked upon as giving money to in the past, and no regulator or any- Robert Fallon: I would not say that picture, as opposed to the four or “What other country could go through economics, which is to preserve the rich bankers. This was created by body else wants to admit past mis- is the case with all Japanese compa- five now that are struggling along, nine years of absolute financial bubble social system.” the mishandling of the Jusen crisis of takes. This perverse set of incentives nies. If you look at Sony, Sony made the economy, given productivity crisis and still have social stability?” It 1995. Politically it is very dangerous makes it very difficult to carry these a tactical error in terms of letting What he did not recognize is failure enhancements undertaken by manu- was not easy to achieve that, he said. to inject government funds to perpet- things through. The point is, when is its overhead expand in line with to address the economic problems facturers, particularly in the export “That’s the LDP’s objective. You want uate this “rich lifestyle of bankers” in denial overcome by reality? It looks Playstation 2 revenues that really truly after nine years thoroughly prej- sector, will be hard to stop. us to turn our socialist economy into the common perception. The positive like, in the Japanese case, you have took off over the last five years. udiced the social system. Koizumi thing about the Resona case is that it Once that growth cooled off, Sony Richard Gitlin: You can no longer recognizes that. I think, fundamentally, provides a new model, a new legiti- was left with bloated expenses. They give one answer to what the the goal in Japan is to preserve what mation of having Government capital also relied for too long on conven- Japanese want. I think there are two is a very special system and relation- injection. tional television sets and let competi- different views that are competing ship among people in Japan, and tors, particularly Samsung, get the and have been for the last five or six to try to fix the economy consistent That is not, however, the only per- jump on flat LCD screens. But this years. One group wants to retain the with that. The power structure is verse incentive structure. Banks are It is amazing to me with all has not escaped them—they have status quo. It benefits from the incen- trying to figure out who does what not subject to any sort of external Most Japanese are troubled come out and said they would lay off tive system that is set up and wants in order to make this happen. corporate governance. The only gov- the things that have been twenty thousand people, shut down to retain the social safety net. about the current conditions, ernance comes from the regulators. Hugh Patrick: Most Japanese are television manufacturing in Japan, Another group embraces the market, Stockholders are passive, and the going on that only a couple troubled about the current conditions, and export the manufacturing to wants to see assets move to their but they do not feel they are big problem for the banks from the but they do not feel they are in a of banks fired their man- China as well as seek joint ventures most efficient uses, and wants a dif- viewpoint of the people who run the in a crisis. crisis. After all, incomes have not to ramp up flat panel screens. ferent set of incentive structures to banks, namely the management, is agers (unless they went gone down. GDP has grown, per be put in place. The reason we are —Hugh Patrick that if things get to a severe point, This certainly never would have hap- capita incomes have increased, and Western). not seeing people agreeing on fair they lose their jobs. Why should pened in the public domain the way so there has not been a crisis. There market value is that this question and they do something that is dramatic —William Seidman that it has happened in the past few has been a hidden crisis, which is the many other questions are wrapped to change things? Management has months for Sony, where the company crisis of the young generation who up in that fundamental difference of a disincentive to make dramatic is publicly contrite about its perform- are not getting good jobs that give views about how incentive structures change. That was shown by the ance and promotes a restructuring them the on-the-job training that is should be set up and whether or not Resona case, where management plan that is quite credible. Ten years important for the future. The real they should change in Japan. The was replaced, but only at the point ago, poor performance would have sacrifice is being made by young same struggle is going on in corpo- at which the bank was insolvent or been smoothed over. people, and that is a very unfortu- rate governance: there are those near insolvent. a market economy. We don’t want nate, hidden dilemma over the to get much closer to bankruptcy William Seidman: That is in the firms that endorse dramatic restruc- to do that because we are trying to longer run. Gradually, people will From the viewpoint of the regulators, than you do in the American case. export economy. They cannot afford turing and embracing capital markets keep people a little more equal in come to realize that. there are no incentives to make dra- That is the Nissan case and the not to be competitive there. I think and so on, and then there is a large their income, but equal in their bene- matic changes either. They want to Resona case, and that means that that part of the economy in Japan, group of firms that are continuing to The LDP senior executives talk about fits. Every answer you give us that go slowly because to make dramatic a lot more of the value of the which is about 30 percent, has play by the old set of rules. I do not social stability and so forth, and says, ‘you must do this to fix your changes on one hand raises eyebrows company is extinguished in this always reacted or they are out of think we are going to see dramatic that is true. They also realize that banking system’ is going to drive a in the Diet and with the politicians, process of waiting until you get business. It does not matter if the changes until that struggle is com- any LDP or other politician who wedge in Japan’s social structure. and on the other hand, it is an close to bankruptcy before really government is involved. They are pletely played out. votes to give money to the banks We senior members of the LDP feel admission that they made mistakes tackling it in a major way. competing in the world marketplace, 20 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 21

and if they do not compete, they equity in Japan. But the immediate are out. problem is a shortage of deals. Right now, there is plenty of private capital I think China is the reason that Japan The viewpoint of the people who run the banks, namely the management, available but too few opportunities to is now changing. There is a new invest. Some of this is due to innate is that if things get to a severe point, they lose their jobs. Why should they export force in the world that can Japanese conservatism about the via- put Japan in real trouble. I think the do something that is dramatic to change things? Management has a bility of private equity, but some is Japanese are awakening to the fact also due to factors I mentioned earlier, disincentive to make dramatic change. —Hugh Patrick that the old ball game is over, and such as a lack of cultural savoir faire there has to be a new Japan that or ability to deal through or with the Hugh Patrick takes into account the huge competi- main banks. tor right on their doorstep. On the other hand, the government Q: Is enough being done with the going on that only a couple of banks improve their quality in generating are going to be such that they really Q: What are the political implications has raised the subject of exit vehicles banking structure to prevent these fired their managers (unless they the credit, and then that credit should will price risk appropriately. That of reform? because they recognize at some point sort of NPLs from happening again? went Western). I think Japan has a be turned over to the market. He does not seem to be happening yet. Richard Gitlin: I have to endorse that this process is going to work. long way to go yet. They have the explains the first level market and the Richard Gitlin: That is a good ques- Q: Two questions: first, in the United what Bill said earlier; I think Koizumi That is at a very rudimentary stage, people, but the people on top have secondary market that he believes tion. You would like to believe that States, the price for failure is liquida- has been brilliant in how he has but it is on the agenda in Japan. not gotten out of the way. has to develop. He calls it the seam- the banks have learned their lesson tion. Do you have that price of managed to maneuver in his position less credit society. Some of Japan’s Hugh Patrick: One way of exiting is and that as the economy recovers, Curtis Milhaupt: One bright spot failure in Japan? Second, if you have and maintain power and keep a reform leaders are clearly focused on what by an IPO. The IPO market is actually they will price their capital on a risk- is the accounting profession, which a deflationary environment with a process going. It was remarkable that should happen, but as Bill said, you quite active right now in Japan, mostly adjusted basis. The Japanese bankers, has improved. The Resona crisis was recession so that many firms fail, he kept Takenaka in government. cannot achieve this without manage- with new, small companies. You whom I have talked to, talk that talk, triggered by a more stringent set of aren’t banks going to be in trouble Some of the senior LDP wanted ment that is capable of achieving it. could argue that the private equity but I am concerned some pricing accounting practices being put into in Japan, even if they are pricing Takenaka gone and he kept him. It deals that have been done so far may not meet this standard. They place. There is a lot of evidence that Hugh Patrick: The point that you credit rationally? is clear that progress is being made have not had a long enough time for have been warned that if they get the accounting profession’s examina- have to price credit according to risk and the people who fought reform Richard Gitlin: The banks have more gestation; it takes five to seven years back into that same old competitive tion of banks has improved. A less is key. So far, that has not happened. are losing, and that is very good for power over their borrowers in Japan perhaps. I think we will see the mode of buying market share at the positive aspect of the Resona restruc- Part of the problem is that you are Japan. Slowly, Koizumi is driving a than do the U.S. banks in the United Shinsei Bank ownership shift either expense of a legitimate return on turing is that ultimately the share- in a deflationary environment, and stake into that old philosophy of the States. If the main bank wants its by an IPO early next year as is their capital, that they are going to holders were left standing, so you so you have some macro constraints. LDP and changing it. company to go under, that company planned or possibly a direct sale. be back in the same problem ten or still have a big moral hazard problem You need to stop deflation and is going to go under. It has nothing Q: To what extent does the relative We will start seeing some exits, but fifteen years from now. inherent in the system. reduce that pressure on the banks. to do with the right to secure collat- lack of exit strategies hinder some of it is too early to worry about that. Fundamentally, the banks are going William Seidman: If you look at Richard Gitlin: Governor Fukui’s eral. Companies are generally the distressed investing and restruc- The market is going to be there, so to have to save themselves by focus- Japanese banking today, there is not speech of November 4 clearly articu- dependent on their main bank for turing? Have there been favorable that if you have a good company ing on becoming profitable once new, young leadership in the bank- lates for the first time in a public survival. If the system were such that developments in this area? and you want to make an IPO for it, again. They have to have conditions ing system. They are going to have speech what he thinks banks should the main banks could recognize the you probably will be relatively suc- under which they can do that, but Robert Fallon: The lack of exit to move into the next generation of be doing in the future in Japan. What true value of their credit, the main cessful. I think IPOs have occurred then they have to take advantage of strategies has affected people’s banking leaders. It is amazing to me he says is they should be generating banks have people that are quite more in Japan in the last six months the opportunities, and the question is enthusiasm about doing private with all the things that have been credit, and they certainly have to capable of dealing with their problems. than they have in the United States. whether the signals and incentives 22 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Restructuring Distressed Companies in Japan 23

and start making use of the machinery. I do not see a big role for the gov- ernment other than this leadership factor.

Japan is the most vertical society I have ever encountered. Within Hugh Patrick: The government should inject capital into all the major companies there are departments that treat themselves as separate banks and some of the less major companies. Within the government, there are bureaucracies that treat banks sufficiently that the banks will be able to really write off their bad themselves as separate governments. . . . One of the real handicaps loans and then be able to go about their business of becoming profitable in fixing Japan is how you get the pieces to work together. credit-allocating enterprises. The —Richard Gitlin problem is that the banks do not have enough capital now to write off as many loans as they really would like to write off, and that is particu- Question and answer session larly the problem with the very big companies. Most of the restructuring talk centers around the mid-size A lot of companies go bankrupt in happened. Everyone in Japan was and we are just seeing how much departments that treat themselves as power and also empower the IRCJ to and smaller companies; it is the big Japan; there are many liquidations involved. I was a banker in Japan corruption came out of that bubble separate companies. Within the gov- unilaterally go in and identify a cor- zombies that are a huge dilemma. of companies in Japan. Usually a and I was involved. Everybody was in every major industry, even the ernment, there are bureaucracies that poration that is non-performing and If I were able to suggest one policy, sponsor comes in and takes over, getting rich. The nice thing about a mutual funds, all as a result of that treat themselves as separate govern- force a restructuring or liquidation I would say, “Be bold! Inject the but they are basically liquidations. bubble is that you do not know you bubble! I want to make sure that our ments. One of the real handicaps of that company as the case may be, government capital into the banks.” Sometimes they are just sold in are in it until it is over. Japanese friends know I am very in fixing Japan is how you get the particularly in the real estate and I say this despite the Resona problem. pieces. The failure of the system humble about saying the United States pieces to work together. Within each construction sector. If the banks had priced credit cor- Japan is full of moral hazard, so one is the failure of the government to knows the answer to all of this. of the ministries, within FSA, within rectly, the bubble would have had Curtis Milhaupt: I think the govern- more does not bother me. The dilemma properly correct the banks in the the banks, the industries, there is a some self-correction to dampen the Q: What would your advice be to Prime ment has done a good job. The insti- is to make the banks strong enough way they deal with their reserves level of remarkably capable people speculative inflation in prices. That Minister Koizumi or Takenaka-san? tutional reforms that have taken so that they can write off the bad and decide who should take the loss who are just sitting there with many is not to say that some firms would place in the last five years in the stuff and then go about becoming early in the game, and get on with it. William Seidman: Koizumi, in gen- of the answers for Japan and a desire not have gone bankrupt. They may corporate area, in the banking sector, real banks. eral, is doing exactly what he ought to make it happen. Leadership is not Robert Fallon: If the banks had well have, but at least there would have been very good. It is not to say to be doing. The Japanese know tying them together and you cannot priced credit rationally, the asset have been some liquidity to clear that there is not a continuing role what the problem is; what they need get a solution to this complex prob- bubble never would have occurred the distressed assets and get through for government, but this discussion is the courage or the political power lem without linkage. The one thing I because the bubble was largely the property correction in a few suggests that the change will come to take care of that problem. would recommend to Prime Minister directed toward real estate compa- years as opposed to a decade. from the private sector, from the Koizumi is to focus on linkage. nies, and that is one of the riskiest Richard Gitlin: Japan is the most banks and the markets. The structure Willliam Seidman: We had a beauti- sectors of lending. In retrospect, vertical society I have ever encoun- Robert Fallon: My recommendation is in place for that to happen, and ful bubble in our banking system, you wonder how it could have tered. Within companies there are would be to keep Takenaka-san in people need to change their mindset EDITORS Joshua Safier Senior Associate Director Center on Japanese Economy and Business

Pat Fantulin Program Consultant Center on Japanese Economy and Business

ASSOCIATE EDITOR Mr. Toshi Ichida Program Consultant Center on Japanese Economy and Business

PHOTOGRAPHY Joseph Piniero

LEAD SPONSORS

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