The Chinese Trade War -- Another Reader's Perspective -- August 16, 2018

This is off the subject but it's too long to place on the main blog and it's too good not to share with readers.

For background see this post, and specifically this from that post:

• most recently, about four weeks ago (?), Scott Adams mentioned in passing but very clearly stated that China will blink / acquiesce / drop tariffs / come back to the bargaining table once we see one or two large banks in China fail -- Scott Adams didn't pick that out of thin air -- his source was impeccable, no doubt, only because it seemed to be such an odd prognostication

I vaguely recall that Scott Adams has banking experience, and at a fairly high level. Anyway, back to the reader's comments.

Unedited, from a reader:

Reading Scott Adams' remarks on Chinese banks gave me a chill.

Years ago, we were Trustee for NM companies and quasi-governmental agencies that issued publicly traded bonds. The transactions were typically 30-year deals at a fixed rate.  (They quickly evolved into more nimble terms as the market changed - but this is earlier on)

So, it was paramount to do anything that could be done on the front end to lower the interest rate.  In the late 1980's, we saw a lot of issuers buy Letters of Credit from the large Japanese banks - Sanwa, Dai Ichi, Fuji, Sumitomo, Long Term Credit Bank of Japan.  The issuers had to pay a fee, of course, but the bondholders were paid by a draw on the Letter of Credit (subsequently reimbursed by the Issuer)  That little two-step complicated our role as Trustee, increased fees for everyone, but still had a long-range payoff. 

Anyway, I closed a fair number of transactions with that structure and met some fairly senior folks in the process.  To a man, (they were all men)- they had come from families that were connected.  Undoubtedly bright and well-educated, there was nonetheless an element of heredity responsible for their positions.  They were insufferable.  I had initially given a wide leeway - imagining what I'd do if the shoe were on the other foot.  The documents for these transactions were hard enough to wade through in my native language.  I could not imagine trying to do it in Japanese (;>)  I repeatedly learned that that wasn't the issue.  They had a haughty disdain for American finance in general (after all, they were providing the Letter of Credit linchpin) and they would tie themselves in knots trying to deal with my attorney instead of me.  He (a Yale grad) would say "Oh, that's a business question, you'll have to talk to the banker.  I'm just here to advise her on any potential legal matters".   We were able to get every transaction funded, but there were times it was dicey - down-to-the-wire.

So, there was sort of a sour taste in the Issuer's mouths, but it was what had to be done..... for less than 5 years.  The Japanese banks got too big for their britches and imploded.  Folks had rued the day that the Japanese bought Rockefeller Center.  I told everybody to relax.  The Scots and English owned all the big ranches - and then they didn't.  (Isn't the Marquis de Mores/Medora story fascinating?).  I didn't know how quickly the candle would burn out, but I had to work with anybody that could get financing for my clients, and I didn't care if they were Martians.  When the Japanese banks failed/contracted/left with their tails tucked, there were several news accounts of suicides.  We watched for one particular name, but he must have lived through it.  ha!  

I'll link the story to the failure of LTCB - but I have to say that very shortly after the J banks' failures, a well-known Japanese manufacturing company came to NM and built a nice plant.  Their representatives were absolutely a delight to work with.  You could tell there was a culture challenge, but these guys were all about getting the job done.  We were invited to the grand opening of the plant.  The NM lead guy had imported barrels of sake and there was quite a ceremony.  We drank from square wooden cups that had a Japanese glyph burned into one side.  I asked what the symbol meant.  He said "White Deer".  I thought that might be a lucky symbol akin to our rabbit foot or shamrock.  He said "no, like American Johnny Walker".  (;>)  Great experience to offset those of the high-handed bankers.  It was my impression that these manufacturing guys didn't even like the Japanese banks.  There were several comments made throughout the years that indicated they were surprised at how much we tried to expedite anything possible for our clients.

So - here's the story of LTCB.  Many of the other J banks had big trouble as their commercial real estate business hit the skids.  If the Chinese banks fail - there will be suicides - that's what caused my chills.  High stakes.

Long-Term Credit Bank of Japan