Fiasco: Blood in the Water on Wall Street by Frank Partnoy Profile Books 252pp, £16.99 in UK
I went to Japan some years ago, flying economy class with Japan Airlines. I mention this detail for a reason. I was not looking forward to the flight from Paris via Anchorage cooped up like a sardine in the back of the Boeing 747. As it happened, economy class was nearly empty and I was able to stretch out over four seats. Business class, by contrast, was full. An Englishman who lived in Japan told me: "The Japanese businessman will not put up with the loss of face associated with travelling economy class." Even then it was not hard to figure out that if loss of face mattered so much to Japanese businessmen that they would pay four times more than me to travel on the same plane, Japanese business had a problem which was profoundly structural. They might work harder than we do, but their costs were always going to be higher. The recent seismic financial events in Japan coincide with the publication of a book by a former Wall Street banker who saw service in Tokyo in 1995. Frank Partnoy says: "I was intrigued by . . . the unbelievable amount of dysfunctional financial behaviour in Tokyo." Partnoy's firm, Morgan Stanley, asked him if he would move to Tokyo as temporary back-up to the local office. He inquired about meal and entertainment allowances. A colleague told him he would need one million Yen - about $10,000 - a week. His first encounter with an authentic sushi bar was in the basement of the Imperial Hotel. He ordered and ate six little pieces of raw fish. The bill came to nearly $100. The following morning he had an English muffin and a cup of coffee at the Eureka restaurant. It was well named: a bun and a coffee and - eureka! - the bill is $25.
Room service in the Imperial Hotel included $8 for a portion of french fries, $7 for a scoop of vanilla ice cream, $6 for a banana and $10 for a coffee. A waiter handed him a 4,500 Yen ($45) bill for a hamburger on April 1st - but it was no joke.
Having straightforward sex with a prostitute cost about three dollars but this was basically a locals-only market. The American ex-pat was expected to pay a hostess $300 simply to serve a beer and talk to him. Kinkier experiences involving the use of a studded leather belt cost $30,000, according to Partnoy.
His hotel, the Imperial, was designed by Frank Lloyd Wright and was one of the few buildings in Tokyo to survive the earthquake of 1923. Or so Partnoy was assured. After a tremor rocked the Imperial in 1995, Partnoy learned "much to my dismay, that the original hotel hadn't been solid at all. It wasn't only the Japanese banking system that was filled with deception and fraud. Even Frank Lloyd Wright and the Imperial Hotel had duped me."
The saga of the Imperial Hotel now reads like a parable that presages the collapse of Yamaichi Securities. In 1990, the hotel's general manager revealed that after the big earthquake, the entire main building started to sink into the ground. The centre of the structure was heavier, and it sank more than the rest of the building. The general manager said the hotel staff periodically had to cut away the bottoms of the doors because of the hotel's sinking centre.
Partnoy's job in Tokyo was to sell derivatives to the Japanese. These are arcane financial instruments which it is not necessary to understand; suffice it to say, they are to banking what snake oil lotion is to medicine. Morgan Stanley loved Japan because the Japanese loved these high-yielding securities. Japanese companies were desperate for profits and would do just about anything, however risky, for a taste.
As Partnoy puts it, "our Tokyo office was swamped with feverish clients, many of whom - now they had caught spring derivatives fever - had begun opening their balance sheets like fragrant cherry blossoms."
Morgan Stanley charged enormous fees for packaging these derivatives. One deal looked as though it would bring in $70 million in fees. Even the Morgan Stanley partners thought this was excessive and discussed giving some of the money back to the client. The problem about doing this was it would alert the client that he had been ripped off in the first place. This dilemma of business ethics was resolved in the only possible way: Morgan Stanley kept the entire fee. This kind of financial extravagance is at the heart of the international banking system, not just Japan's. The question arises - how many more time bombs like the one that brought down Yamaichi are ticking away in the system? Jim Dunne is an Irish Times staff journalist