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Monday, 22 September 2008

Go player buys chess player

Following Morgan Stanley and Goldman Sachs applying to become traditional bank holding companies, shares in Morgan Stanley rose in pre-market trading today on the news that Mitsubishi UFJ (Japan's largest bank) said it planned to buy a 10-20% stake (for up to $8.4bn max) as part of a global strategic alliance.
In August Mitsubishi UFJ Financial Group Inc bought 35%of UnionBanCal Corp to make it wholly owned(at $73.50 a share, worth $3.5bn). Nomura bought the Asian arm of Lehman Brothers (for only $225m) and Lehman Brothers Europe (London). Japanese banks have been through an enormous property triggered crash (after a very long sustained growth period) that Anglo-saxon banks are currently experiencing. Comparisons between Japan in the early '90s and Anglo-saxon banks then and now are instructive, but not news. We must just hope that the long decade of flat growth experienced by Japan (during which the government pursued only an export-led growth policy) is not what the US, UK and others will experience (probably not since there is a stronger bais in favour of endogenous growth policies, in the US especially)
Japan's banks have not been immune from the 2007/8 credit crunch. Mitsui Sumitomo's capitalisation (currently $44bn) had fallen 62% to $24bn from $64bn before recovering. The two biggest Japanese banks, Mizuho and Mitsubishi UFJ ($69bn and $109bn capitalisations respectively - when most major Japanese stocks appear to be trading at or just above book value), are products of long term rescue and merger consolidations (more than a decade after the crash of the early '90s and following over a decade of near-zero, sometimes negative real, wholesale rates on money from the Bank of Japan (note: Mizuho's NYC offices were in the Twin Towers and I had work there at the time and wa shappy at least that my closest friends there survived; many colleagues did not).
The 3 big Japanese banks have not yet regained long-term unsecured credit ratings to blue-chip status, inhibiting expansion. But the three have long expanded into overseas markets where fees are higher. Mitsubishi UFJ has been the most international. The core banking units of the gigantic Mitsubishi group are Bank of Tokyo-Mitsubishi and UFJ Bank. These merged in 2006 to form The Bank of Tokyo-Mitsubishi UFJ and currently has about $1.6tn in assets. Bank of Tokyo dominated Yen/$ FX trading and fixed income and for 20 years enjoys the best, most accurate and comprehensive, front office risk & p/l accounting system on the planet - something I can take personal pride in. It was the superior quality of its front office accounting that alerted the Bank of Japan, Group of 30, NY Fed, and eventually BIS to serious flaws in other banks' accounting systems. Enquiries about this, in which I was involved in USA and UK, led eventually to the Basel I system of prudential regulations.
Paradoxically, this was at a time when in the early to mid-'90s, western banking was hyper-critical of Japanese banking's regulatory standards, blaming regulatory failure for the Japanese bubble burst that ushered in a long low growth period and the end of the Japanese 'tiger' boom economy. In fact, the crash was a construction and property crash at a time when these sectors ccounted for about 25% of Japan's GDP (six times higher than in Western OECD countries)and it was the ubsequent failure to boost and erstore domestic demand that kept annual GDP rates low.
With Bank of Tokyo Mitsubishi UBJ (and UnionBanCal) strategic tie-up with Morgan Stanley Bank, if there is now a technology transfer and business culture exchange (in some, not all aspects) between the two, I would buy the stock.
Mitsubishi easily has pockets deep enough to buy the whole of Morgan Stanley (and others) outright, but Japanese business strategy is not so impulsive or so rash (about political culture as well as business merger issues). To understand this it is worth considering that if western firms play Chess in business, Japanese firm play Go! If you don't know what I mean - the essence of Chess is the gambit to win at all costs, while in Go it is territorial advantage to be gained at minimal cost.

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