Already a Bloomberg.com user?
Sign in with the same account.
International -- Cover Story
THE YAKUZA AND THE BANKS (int'l edition)
Grappling with $350 billion in bad loans, Japan now realizes mobsters cemented ties to the banking system that will be hard to break
With his chiseled features and cinder-block build, Hiroshi Asaji looks menacing without much effort. As a self-proclaimed "land turner," he was hired by property speculators in Osaka to force reluctant owners into selling lucrative property sites during Japan's 1980s real estate explosion. His tactics? Everything from placing blaring stereo speakers next to the house of a stubborn resident to hiring a gang to crush six ribs of another owner. Asaji makes no secret of the fact that he sometimes committed crimes and worked closely with the yakuza, Japan's criminal gangs--all confirmed by the Osaka police.
Since those days, Asaji, now 47, has diversified his Koyo Group into finance lending, real estate speculation, and love hotels, where couples can quietly take rooms. Some of Asaji's business activities are legitimate, others borderline. And although he had to sell off seven real estate holdings in Osaka and Tokyo to pay down $300 million in debts when property prices started to collapse in 1991, he isn't exactly hurting.
On a blustery winter evening, an engaging Asaji escorted a visitor in his Mercedes-Benz 600 (he has a Rolls Royce, too) to an opening bash at his new nabemono, pot-bowl restaurant, in central Osaka. His staff, already gathered, hastily dropped their chopsticks, clicked off their cellular phones, and greeted him with a flurry of deep bows. Why is Asaji so forthcoming about his underworld connections? "This isn't a secret in Japan, and besides, I haven't done anything illegal--recently," he laughs.
Asaji is merely one member of an entire class of shady operators lurking in Japan's financial system. As the nation attempts to come to grips with its $350 billion bad-loan mess, it suddenly is becoming clear that the yakuza played a major role in creating the "bubble economy" of the late 1980s, when land and stock prices doubled and trebled. Taking advantage of the speculative fever of the era, gangs migrated from the shadowy periphery of the economy, where they concentrate on prostitution and drug-running, right into the heart of its financial system. As much as 10% of the bad loans officially recognized by the Ministry of Finance--or $35 billion worth--are now believed to have gone to the yakuza, figures Raisuke Miyawaki, a former investigator and corporate adviser on the gangs. Some estimates put the total amount of bad loans at about $800 billion, more than double the $350 billion officially acknowledged.
All this helps explain why the banking mess has proved so intractable--and why the government's new moves to bail out some failed financial institutions with an initial $6.8 billion public contribution is so controversial. Taxpayer dollars are going to be used to rebuild a banking system that can't recover on bad loans because the yakuza refuse to repay. In effect, Japan is embarking on perhaps the first-ever taxpayer-financed debt forgiveness of a nation's criminal underworld.
The all-powerful Finance Ministry, which lords over every aspect of the nation's financial life, is attempting to portray the yakuza as key culprits in the post-bubble debt overhang. It's true the yakuza won't repay many of the loans they received from credit unions, housing-loan corporations, and real estate companies--and terrified lenders are afraid to press the issue too far. Twenty violent attacks against financial and corporate executives have been reported since 1994, including gangland-style executions of Sumitomo and Hanwa bankers who were attempting to collect.
But one reason someone such as Asaji is willing to come forward is that the yakuza didn't create the mess by themselves. Regulators and mainline bankers failed completely to prevent smaller, highly leveraged financial institutions from building up huge pyramids of debt that forced them into ever more reckless practices. In a fascinating glimpse into the way Japan works, the accusations and cross-accusations are revealing a pattern of cooperation among MOF elites, politicians, banking executives, and the criminal gangs. This recognition is rocking Japan's political world, and it explains, in part, the surprise resignation on Jan. 5 of Socialist Prime Minister Tomiichi Murayama. After he announced the $6.8 billion taxpayer bailout on Dec. 19, his political position became untenable.
Successor Ryutaro Hashimoto, president of the Liberal Democratic Party, will feel the heat, too. In late January, the Japanese Diet will hold hearings on the MOF-brokered bailout of Japan's seven insolvent housing-loan corporations, or jusen, some of which are yakuza-linked. These jusen rang up $65 billion in dud loans on soured developments of everything from condominiums to golf courses.
POLITICAL ISSUE. As Finance Minister from 1989 to 1991, Hashimoto will need to explain why the jusen were exempted from rules aimed at curbing real estate lending--all the more so since taxpayers could be hit to the tune of $20 billion when the jusen bailout is finished, according to some estimates. Sensing blood, the opposition leader, New Frontier Party President Ichiro Ozawa, is attempting to exploit anger over the banking bailouts. "This is all being done under a veil," figures Ozawa. "The intent is to create as few waves as possible."
To help with the cleanup, Japan plans to set up its own version of America's Resolution Trust Corp., with Japanese police backing. The police would have the power to raid offices, grab records, and trace where yakuza money was channeled. But a true unmasking of the unholy alliance between the yakuza and the banking world would require an investigative campaign that would prove deeply embarrassing to business elites from Tokyo to Osaka. There also would be more than a certain measure of hypocrisy in an MOF-led campaign to portray the yakuza as the primary culprit in Japan's bad-debt mess, says Yukio Yamanouchi, a yakuza defense attorney in Osaka and former legal adviser to the 33,000-member Yamaguchi-gumi, the nation's biggest gang, led by Yoshinori Watanabe. "The bubble was the result of banks lending money too easily, while the government tolerated a policy of a high yen and a low U.S. dollar," he says. Unsurprisingly, the gangs themselves never comment publicly.
What will future investigations reveal? Police investigators, MOF officials, and yakuza sources point to several patterns of gang involvement with Japanese lenders. They center on roughly 24 real estate companies that Japan's National Police Agency has identified as having yakuza ties, if not outright ownership (table). They, in turn, borrowed money and later preyed on smaller lenders, such as the jusen and credit unions, that collectively became big players in Japan's go-go real estate market.
Even when yakuza-affiliated institutions didn't actually own property, the gangs were instrumental in forcing rapid changes in ownership. At first, Asaji and other land turners didn't encounter much competition from established gangs in the land-extortion racket. Asaji would work discreetly with the real estate arms or other nonbank affiliates of local lenders. "During the bubble era, the banks set up subsidiaries and finance companies," he explains. "It was through these companies they would pay or loan to us," often in return for clearing property. Sometimes his methods were creative. Asaji once shipped in nearly 100 chickens to create a stench in a property next to a house to persuade--successfully--an owner to sell.
However, by the late 1980s, as property prices surged monthly, yakuza outfits started moving in on his turf and were even hired by his own extortion targets. "They started bringing in yakuza to counter independent operators like me," Asaji said. "I hated paying the gangs, so I had to hire a higher-grade yakuza, like Yamaguchi-gumi, to survive."
Over time, the Osaka gangs cemented their ties with lenders and real estate companies to a startling degree. Last year, when Osaka regulators began scrutinizing the books of busted regional credit union Gifu Shogin, they found that nearly $70 million in loans were linked to yakuza-related real estate companies, according to a source with Kansai Kogin, the entity that absorbed the busted lender. The loans had gone into condo and office development. When property prices crashed, Gifu started to call in the loans, but the yakuza wouldn't pay and grew threatening. Bank managers had to bring in police for personal protection. JUICY INTEREST RATES. Another key player in the web of shady financial dealings is Sueno Kosan, an Osaka real estate company that was a big beneficiary of ill-guided jusen lending. Sueno is perhaps the biggest gang landlord in Osaka, and Yamaguchi-gumi mobsters now work out of seven Sueno buildings, according to The Daily Yomiuri newspaper and Osaka police. Two jusen hold mortgages on two of the buildings, say Osaka regulators.
Renting to the Yamaguchi-gumi seemed attractive back in the late 1980s. No regulators asked about possible yakuza involvement, and no one thought about what would happen if values plummeted. Now, the money probably will never be repaid. Sueno, which owes the jusen $2.2 billion, can't find a buyer for the gang-infested buildings. Such sorry instances help explain why more than half of the jusen loans are uncollectible. Sueno has declined to comment.
Perhaps the biggest bombshell to come, though, will be Osaka-based Kizu Credit Cooperative, a $12.3 billion thrift, formerly Japan's largest, that collapsed in August after a massive deposit run. A ferocious land speculator with $9.1 billion in dud loans, Kizu is one of the most expensive bank failures to date, having already drained more than $1 billion in Bank of Japan money to cover deposits. It likely will be the target of a criminal investigation because of suspected loans to "dubious companies," says one MOF source. It is emblematic of the web of transactions that sometimes tethered the mob to Tokyo's biggest money-center banks.
Under the leadership of Kizu President Minoru Kagiya, the thrift diversified away from business lending into real estate. And to build a war chest, it started in the late 1980s to lure depositors with interest rates as high as 2% above the market. From 1987 to 1990, one of its biggest sources of funding came courtesy of Sanwa Bank Ltd., the Tokyo money-center giant.
Sanwa arranged for its corporate clients to raise millions in short-term commercial paper. The clients would then deposit the money into Kizu and benefit from the big spread between their high-interest thrift account and what they were paying to their investors on their corporate IOU. It seemed to be a risk-free way of locking in profits. Sanwa, meanwhile, profited handsomely from its underwriting fees. And Kizu watched its deposit base soar.
By 1989, some 36%, or about $3 billion, in Kizu deposits came from Sanwa, and about 10 of its ex-employees were working for Kizu, Osaka regulators say. A spokesman for Sanwa confirmed that his bank dealt with Kizu but said the practice ended in 1990. He stressed that the bank has no knowledge of possible Kizu ties to the mob. The blue-chip Long Term Credit Bank of Japan also steered money, though smaller amounts, to Kizu, but severed relations in 1991, a spokesman says.
NICE CRISP NOTES. What did Kizu do with its deposit windfall? Investigators suspect that some of the money went right into the pockets of yakuza gangs, sometimes for clearing land and in other instances for straight loans. According to Asaji, Kizu and its two affiliated companies started steering direct loans to the land turners or the property developers who used these thugs. Osaka regulators confirm that Sueno Kosan was a major depositor with the credit union. Kizu also declined to comment.
After reviewing Kizu's books, Osaka regulators say they have evidence that the thrift intentionally inflated the value of its loans that went out for properties in the Osaka area. When property prices skyrocketed, Asaji says, Kizu would lend more than the market value of a real estate project to factor in the costs of using the land turners, called jiageya. "Even if they knew the money would go toward jiageya, they would still lend," Asaji says.
When land values collapsed, starting in 1991, an increasingly desperate Kizu continued the practice to keep its interest income high. "If they knew a property was worth $5 million, they would provide a $10 million loan to inflate interest income, even if they knew the loan would never be repaid, " explains Shigenobu Suzuki, a credit union regulator in Osaka.
After Sanwa and others severed relations and property prices fell, Kizu started offering suicidal deposit interest rates and made one reckless loan after another in a desperate bid to keep its interest income high enough to fund operations. By the time its money-churning strategy crashed in August, some 88% of its loan portfolio had been steered into dud property deals on behalf of 10 real estate companies, at least some of which had yakuza ties, investigators say. To add insult to injury, Osaka police still are trying to track down who walked off with $1 million worth of neatly pressed yen notes from Kizu headquarters that the Bank of Japan provided during the deposit run.
As the MOF tries to get serious about cleaning up the banking mess, it is stumbling into dozens of examples of mob involvement where the trail ultimately leads to money-center banks. The MOF and other regulators barred these banks from taking a direct part in the dirty money games of the late 1980s. But they winked when the banks began using affiliated finance and real estate companies such as Kizu to go for quick, big returns in deals that often involved the yakuza. "That way, [the bankers] could say, `Hey, it's not on my books,"' says J. Brian Waterhouse, banking analyst for James Capel Pacific Ltd. "When money begot more money, unsavory characters were sometimes allowed to move in."
BOGGED DOWN. As shocking as the extensive yakuza involvement may be, there is scant prospect that regulators will be able to fundamentally reorder the financial system. Going after the yakuza will be a tall order unless financial executives who hired them or financed them also take the fall. Until they do, the image of a Japan unable to clean up house, bolstered last year by bank runs and the $1.1 billion Daiwa Bank treasury-bond trading scandal, won't vanish anytime soon. Nor will the "Japan premium" that has driven up the interest rates that Japanese banks must pay to borrow internationally.
None of this means that Japan as a whole is somehow doomed. Its industrial economy has been largely untouched by the yakuza-related scandals, and, indeed, there are signs of an impending economic recovery. What it does mean is that political leaders, financial authorities, and bankers are likely to be bogged down in coming months and years in trying to find a way to clean up the bad loans without going so far that they reveal their entire system was tainted by corrupt dealings. Chances are slim that much money will be recovered from the gangs. "Even if they crack down on the yakuza, it doesn't mean they will get the money," says gang attorney Yamanouchi. The reason is that the gangs and their associates, such as Asaji, possess a powerful weapon: the knowledge that they did not act alone.By Brian Bremner in OsakaReturn to top