|DATABASE: CITIGROUP PRIVATE BANK JAPAN - PERIOD IV
Post FSA Second Measures
Interview material relating specifically to the Citigroup Event but with substantive allegations redacted to within the scope of the FSA Second Measures findings
|21 September 04
Foreign Private Banker
Today spoke with the Citibank contact man and there seems to be a wave of customer lawsuits in the making against Citi. The heavy gearing of customer structured product exposure on account of being funded by large bank personal loans is the not unexpected problem. Given the FSA finding of unfair pricing, customers will naturally start claiming damages as they wake up to the extent of the losses as their accounts get closed off and revalued. Citi does not have a leg to stand on in these circumstances. There are very substantial contingent losses at the Citigroup Private Banking operation and this is a point that commentators have overlooked. It is going to be a far from painless withdrawal by Citi.
21 September 04
Big Picture, Citi worldwide has had a reputation for a fairly rough and ready 'go-for-this-go-for-that' strategy over the years culminating most recently in its near-collapse following the 1980s Sovereign Debt Crisis with its heavy exposure to Latin America. New York had always left Japan pretty well alone as a perceived oddity and it was all up to the local staff both domestic and expats. Citi was notorious for taking a relaxed attitude to Japanese compliance issues relying on its status as a major US bank able to call on the US Embassy to iron out any unfortunate glitches. Rapid personnel rotation also helped to diffuse any awkward responsibility issues. The foreign media reporting seems to be quite poor now: the issues require a demanding level of technical knowledge and experience. Overseas there must be the negative impression that the foreign banks are being picked on as Analytica perceives through the style of questioning from the necessarily uninformed foreigners. There is a serious presentational problem for the FSA, which overall has done a good job in nailing the part played so disgracefully by the New York Head Office in setting impossibly high profit targets and then not bothering to require proper compliance procedures to be followed. The parallels with Abu Ghraib are clear and the FSA should offer its investigatory services to the UN! There now seems to be the additional problem for Citi in Japan that the underlying retail banking is possibly unprofitable given the thin spreads available, and it may have been cross subsidised by the private banking operation to some extent. So with private banking and trust banking also being closed, there is a question mark over the continued Citi presence in Japan in retail so the branch network might very well go. The FSA is aware of the situation and concerned about the prospect of an uncontrolled exit. Also, very confusing is the style of the leak to Yukan Fuji and the right wing press apparently from the FSA itself as reportedly there has been some dissatisfaction in the FSA that Takenaka had been running around on the UFJ Event case without informing his staff fully. The release of the punitive measures details prompted by the leak was an odd timing just ahead of Koizumi's one-on-one with Bush in the US. In the past, that kind of timing has always been avoided.
24 September 04
Think Tank Staff
.....Repeating again, Allfinanz Reform is going to be a German crabwise disintermediation and a household switch out of deposits into securities. Of course, there is a strong political background too, in that the government directed allocation of funds in the old on-shore Manchurian Banking Model, Manchuria II, meant among other things PWE construction and general LDP monkey business involving the Forces of Reaction. As Yosano perceptively on Sunday Project recently, but rather too complicatedly as is his style, said, "Much of the reform is a question of the appropriate allocation of capital, shikin no saiteki haibun," so it means political change as the politicians drop out of the circuit and have to find alternative sources of funds for themselves. Everything moves from controlled, kisei, to liberal, jiyu, and it is good news for the foreign players who should wake up to the situation, but who have played the NPL created 1997/98 crisis so remarkably short-sightedly and badly and into the hands of Kasumigaseki by coming in simplistically or, in the curious Analytica term, coming in on the basis of the 'Wichita Wakamatsu Fallacy' and getting burnt on the lack of resulting business in Wakamatsu by being so constrained within the structuring of their Wichita-based business model. Also the cunning non-trade compliance incoherency barriers are a useful stumbling block to help the consequent general disillusion and disengagement process along. Now that the financial economy is recovering and restructuring in a foreign management-friendly way, it is the wrong time to leave. The way the FSA closed out Citigroup private banking and trust banking was excellent timing with hindsight and the FSA men are no slouches when it comes to that kind of thing, so it would all have been done with keen foresight.....
30 September 05
The FSA finally came down on the outrageous Citigroup Private Bank Tokyo racket as was so widely expected despite all the delay and apparent prevarication. When US commercial + political pressure push came to restructuring the Japanese financial economy + generating stable tax revenue shove any good bureaucrat knows where his duty lies! Have been reading the FSA 17 Sep 04 Report material in detail and it is a fine piece of work with a lot of hard nuggets of regulatory philosophy rather obscured by the form-over-substance penchant for excessive detail. Overseas everyone will rely on the FSA's poorly edited English direct translation of the formal and very precise and overly concise Japanese legalese. Number, as in singular/plural, is a particular trap no doubt entirely unclear to the general Occidental reader. Personally, however, having a reading knowledge of everyday Japanese, could understand the direct translation, chokuyaku, English. Most foreign readers of the FSA Report would not be in that position! First there is a key issue of functionality raised ie the product/region matrix based Anglo-Saxon management style that is now a de facto global player standard and which means that the shots are all called by the profit centre product head in the Head Office and outside the reach of the local regulator. While nominally a balancing weight in the matrix of product and region, the region gets entirely pushed aside so the regional head becomes a cypher viz the famous 'Last Emperor' at Credit Suisse Tokyo who effectively resigned on being turned into such a cypher. Thus the wretched country head man at Citigroup Japan, who got his marching orders in June, probably deserves a degree of sympathy, although he notably got absolutely none at all and a simple avalanche of quite vindictive abuse. The FSA Report therefore actually poses a major problem in financial services regulation that is apparently not working. For plain vanilla banking in the old days, under the 'BCCI Rule' it was the regulator of the substance-over-form Head Office in that case London and the Bank of England, that should have to pull the plug and then the local regulators follow suit, in Japan MoF at that time, and so BCCI Tokyo promptly got closed. The US authorities in the new US unilateralism seem now not to be playing ball under the 'BCCI Rule' and the Fed and SEC have looked the other way over Citigroup: there is a suspicion of monkey business and of a tendency towards crony capitalism developing which is slightly inconvenient for everyone else. However, the Japanese authorities proved their mettle at the end of the day. As private banking professionals joke, the Abu Ghraib parallels are indeed strong. Of course, the functionality issue is also seen in tax affairs and the OECD moving to deal with Global Trading, off-shore private banking etc as sources of tax revenue leakage is the correct multilateral way forward. Anyhow the unilateral US is currently not contributing to world financial services global peace for sure. Second there is the issue of prudence, informed consent, fairness etc or fiduciary duty or whatever one wants to call commonsense business ethics. 'Informed Consent' seems to be the current buzz word. The FSA Report needs to be read carefully. It is like a Confucian discourse on ethics, correct but in terms so different that the all too-average Anglo-Saxon media mind dismisses it as Oriental, pardon the expression chinky-eyed, quaintness. Properly understood of course, Japan is getting its act together for household sector financial disintermediation in a careful scheme of things parallel in its own way to Germany and Finanzplatz Deutschland similarly dismissed as some sausage-eating-beer-swilling nonsense. It will be interesting to see when the Anglo-Saxon media wake up to what is going on here and there. The senior management of the Bank is way behind the curve as regards the impact of the current Allfinanz Phase III measures and are still stuck in the chinky-eyed quaintness mindset. If it works elsewhere, it will work in Japan is the attitude and people will always come to the Bank. The idea that there is a structured re-organisation of the entire financial economy going on is quite incomprehensible and it is indeed the unseen elephant in the room. The current form of remote management control from Singapore, of all places, is no help either. Indeed, the Singaporean Oriental world view is as off-target as the Anglo-Saxon Occidental world view is. Personally have settled in Japan and so have a strong interest in the Bank not having difficulties in Tokyo, but the current private banking plan by all accounts is like the Citigroup plan, via the Bank, and is a compliance nightmare with certain other problems, which are invitations for a disaster. Need somehow to wake up Head Office to not being played around with by the FSA and being closed at a time of their choosing. Am not in touch with the Private Banking team but there seems to be a 'hold' in place and some dissension, but as the Head Office senior management has publicly given the go-ahead ultimately nothing can be changed.
30 September 04
Foreign Private Banker
Had been aware for some considerable time of offshore trust settlement, life assurance policy writing etc being conducted by fliers coming into Japan through Narita/Citibank Marunouchi so Citibank has clearly always been something of a compliance menagerie. Certainly there could have been no real attempt at informed consent in such circumstances as part of the risk was in the very service being offered. The FSA Report does not seem to deal with any analysis of the compliance problems, scale and relative weighting, it is more a haphazard listing of concrete incidents like some housewife's tale of the events of the day. No doubt the underlying facts were all found by the very industrious FSA staff as they rootled through the files for months. The Report should have stated the broad philosophy of the FSA as regards regulation, the chronology of Citigroup Private Banking in Japan and past regulatory actions etc, and finally the current inspection scope, objectives, results and consequent penalties all set out analytically. Japan is always working at a PR disadvantage vis a vis the Anglo-Saxon English language media: there is a deep well of prejudice, the journalists are often on rapid rotation, poorly paid, unable to read Japanese, poorly informed etc. There is a standard negative view of Japan encapsulated in the clipping files from the same English language press and so the same old formulations and criticisms are repeated ad nauseam. It is very strange, but there appear to be the two Japans: 1. the actual here-and-now Japan and 2. the Japan as-it-is-perceived-to-be, but-is-not. This all seems to owe more to the fear and threat of the 'other' and has a psychological basis no doubt. Most probably, it also reflects the level of general culture of the overseas readerships and the offending articles are written to match. However, having met some of the journalists in question, that would seem to be a too charitable interpretation. Anyhow, in the actual world of Japanese financial regulation, and in the Citigroup Event case, there has indeed been a clear advance as part of the general upgrading of Japanese financial regulation. Of course, predictably the reporting in the foreign press never indicated that at all. Also, equally predictably the FSA with its ineptly prepared English language version of the Report assisted in perpetuating this now widening gap between foreign prejudiced perception and Japanese slowly progressing actuality. It is all very strange and sad. There is even an unfortunate chain of circumstantial evidence that the Asia Editor of a certain leading US newspaper in Head Office, after consultation with Citigroup Head Office, demanded extensive revision of an unusually objectively written article on the Event. The FSA should realise that, given these problems at the Report's target audience, the Report should have been drafted in English from the Japanese base data by a native speaker competent in the legal and financial terminology and back-translated into Japanese, or at the very least drafted in Japanese and translated, edited and laid out by a native speaker competent in the legal and financial terminology and all according to overseas best practice standards. Fairly obviously, the eclectic mix of highlighting colours is quite inappropriate for such a report's headings. The very clumsiness of the translation, typography, layout, highlighting etc detracts from the credibility of what is obviously a very important piece of regulatory action. The FSA bureaucrats should realise that they are in a global market and fighting for regulatory credibility. As a simple point, why should the translation be 'provisional', as there will never be a 'final' translation. The best practice wording in this respect is standardised: 'an official translation with, however, priority of interpretation being given to the original drafting language in the case of conflict in meaning'. These little things are important in building overall credibility. If, as in this case, the FSA is doing such a good job, then it should demonstrate so more emphatically and with greater presentational sensitivity for its target overseas audience. Hiding the light so effectively under the bushel makes no sense at all, quite frankly speaking. Somebody ought to give the FSA people some friendly advice at a senior level: they certainly need it.
30 September 04
The basic rule is that the parent establishment authorities look after the Head Office and the host authorities look after the Local Office and there is liaison between the two that goes back to the 1983 'Basel Concordat'. The liaison is effectively on a case by case, baatari, basis. The problem at Citigroup Tokyo was that 1. the orders for business improvement following the 2001 inspection made on account of violations of the Bank Act Article 12 etc had not been acted on as discovered in the 2003 inspection, and 2. the kinpanho, Financial Products Marketing Act, that establishes a required degree of product explanation higher than the Bank Act was passed in 2000 and came into force in 2001 and the various requirements were not incorporated into the operating procedures at Citigroup. Nothing more can be said. Do not understand why there should be so much Analytica interest in the timing of these various matters and by implication interest in the various timing gaps. Is it all that important? The Agency cannot always be running around on the basis of mere market tittle tattle after all.
14 October 04
Reportedly MoF's Tanigaki had said on Tuesday 12 Oct 04 at a reception + dinner that foreign bank participation in Japanese private banking was a case of "Thank you, but no thank you" according to the perception of one key participant. Tanigaki spoke in Japanese and maybe there had been some interpretation problem as it was a generally somewhat unlikely thing for the MoF man to have said in such circumstances?
On Tuesday there was the welcome reception + dinner and any statement made was made informally without notes and records. Was not present and cannot say what was said and heard. However, as Analytica suggests, given the 'Free Fair Global' Policy from Hashimoto's Big Bang, most unlikely that any such sentiments were uttered by a member of the Japanese Cabinet. As a matter of common sense such a thing would not have been said. On the Wednesday afternoon there was a formal speech and there was definitely no mention of private banking as was present personally. Agree with Analytica that there has been a lot of misunderstanding/misreporting in the foreign media re the Citigroup Private Bank Japan Event so generating a quite mistaken view of Japanese government policy overseas which is all rather tedious quite frankly speaking.
21 October 04
The FSA was confident of taking its measures against Citigroup because it had a massive file of data and had been watching the highly problematic Citigroup as a diligent Japanese bureaucracy for some considerable time. The cat watching the mice etc. Takenaka's discussions with the New York Fed in August were widely assumed to be UFJ/MTFG related, and were so in a curiously indirect way, but were reportedly primarily concentrated on the unfolding Citigroup problem. Maybe that is why Takenaka had such a knowing smile on his face when mistakenly interviewed by Tahara on TV Asahi's Sunday Project programme. The so clear and so faulty management link New York/Tokyo was highlighted by the FSA and the implications would be that in other product areas and in other geographical areas there are similar faulty links. There would seem to be the Wriston, Reed, Weill line of a 'go-for-this-go-for-that' business strategy with something of a compliance menagerie, lack of hands-on central senior management control with the periphery notably cutting corners to reach the central budget targets. Japan would have been part of that too, of course, as previously mentioned. The issue of Global Trading and making a tax audit trail practicably impossible is another area of concern. It has arisen with the US IRS and the Japanese NTA re Citigroup reportedly. However, tax audits are generally planned on a cost/benefit analysis ie how much effort in investigative cost for how much additional tax revenue benefit recouped. It is a surprisingly hard headed P&L attitude and the NTA for one is shy about talking about such matters as it blows a hole through the kazei no kohei gensoku, tax burden fairness principle, etc. Complex overseas schemes have high inherent investigation costs so there is inevitably an issue then of apparent double standards arising. Another problem is that rogue employees could work Global Trading as a highly sophisticated teeming and lading scheme. There may be considerable jumpiness worldwide about Citigroup consequently and this then post factum explains Takenaka going hotfoot to New York when he did ie there was an FSA desire to nail Citigroup at that point for complicated Japanese reasons of MTFG/UFJ and retail private banking Allfinanz policy, but an undertaking that it would be only limited in extent and 'under control' as it were at the time of the US presidential election campaigning.
25 November 04
Foreign Private Banker
As mentioned by phone, a certain foreign bank's Private Banking Operation recently received an unexpected FSA visitation and there is therefore every expectation of a Citigroup Private Bank Event Mark II as it were. Of course, the certain foreign bank is under much better quality senior management than Citigroup at all relevant levels and with a fully functioning management structure: Head Office, Local Country Officer, Private Banking Unit Head etc. It is unlikely that there will be the same bizarre list of transgressions and the same image of a private banking animal house. However, it seems to have been running a similar US-style private banking operation at bottom: the larger integrated institutions with their, often poorly controlled cost bases even in the case of the exemplary certain foreign bank, as always get drawn down the path to perdition by the high profit nature of such an operation: taking money liberally from the client in a kind of disguised daylight robbery via loan spreads and structured product, fees and commissions. Without the same US and UFJ complications of the Event Mark I and being a much smaller operation, there should be a faster outcome ie the inspection, findings and measures all fairly snappy this time. In fact, there are already reports of the bulk of the inspectors having returned to base. [This 'certain foreign bank' subsequently over mid-2005 accomplished an exemplary and discreet low profile withdrawal from Private Banking in Japan fully in line with its quality management credentials.] In a separate development, there was an NTA visitation of the Bank recently taking interest in the DOI provisions of the Forex Act as used for a number of clients in legally watertight off-shore investment schemes with the agreed return to Japan of sufficient taxable income etc. It seems that the hint is that even these fully compliant off-shore schemes are now frowned upon. Head Office is very concerned about the reputational risk and is rapidly turning negative on Japan. There is even talk of the Tokyo Office being closed etc. The exemplary punishment of Citigroup, the inspection of the certain foreign bank and now even fully compliant DOI schemes being placed off-limits makes Japan increasingly "iffy" on the private banking front for all foreign players. In place of the closing Cititrust, am talking around and the domestic trust banks all want separate accounts being opened by clients for off-shore securities portfolio work and that would be flattening in terms of administrative costs. Do not really understand the meaning of the new proposed trust companies and the supposed obsolescence of trust banking as explained by Analytica. The "iffiness" of Japan is being increased by untransparent changes to trust legislation and an apparent squeeze on trust bank business by these unreasonably high carry costs of individual securities accounts for clients off-shore when using the services of the Japanese trust banks. There seems to be a pincer attack on off-shore private banking as regards compliance requirements and client carry costs. Sentiment is moving against Japan as a market for private banking. In particular, conservative Swiss-style private banking simply becomes unprofitable as is now being experienced by the new compliance overkill on trust banking and the US-style being inherently non-compliant as a result of the incoherent and compartmentalised licensing framework.
24 December 04
.....The Citigroup Event is very bad news for private banking in Japan as it sends the wrong signal and, as said previously, it was a disgrace to call a systematic plundering of the client base private banking. Citigroup bears a heavy responsibility for the gearing loans US-style and dakiawase, bundled, multi-year lock-up structured products typically 70/75 percent invested in a zero coupon bond to maturity, hence the lock-up period, and the remaining 30/25 percent being invested in derivatives, in the old days equity warrants but these days something more exotic, and the story line was get your principal back together with a large plus alpha on the derivative exposure. There were even cases apparently of lengthy lock-up period products being sold to persons with, how should one say, entirely inappropriate expectations of life. It was disgracefully profitable as money was made on the loan spread and product fees and commissions. It had no more connection to private banking than common gambling. Anyhow the whole thing is to be wound up by end-September 2005 and the operation closed so the accounts are being valued and closed out. There will be fairly substantial restitution claims and a string of court cases as the next step. If the media picks up the story there could be large total loss amounts bandied about, hard luck cases and all the rest of it. When the Bank's Private Bank Operation was mercifully finally subject to euthanasia there was exceptionally such a geared scheme for a rather a pushy female customer, but fortunately the maturity term was short and the position got closed out smoothly without problems about loss of principal. According to a good friend at Citigroup Private Bank, there were around 50,000 retail customers divided into plain retail with financial assets with Citigroup of less than JPY10m, "Gold" between JPY10m and JPY30m that did not mean very much for the clients fortunately for them and "Platinum" above JPY30m when the full Abu Ghraib, as it came to be called, private banking treatment was applied. A certain foreign bank has received an FSA visitation in early November and the 'Wealth Management' operation at certain other such banks must also be in the firing line too. There have been Nikko/Citi problems too and so what used to be called NSSB is under pressure and a general reduction in the Citi presence as regards staff and equity interest, despite protestations to the contrary of a commitment to Japan. References in public to a "Commitment to Japan" is about as convincing as ditto to a "Strong Dollar"! The Mizuho stake in Nikko Cordial underlines what is going on. With the 400 odd private banking staff being expected eventually to walk the plank, there will be a spate of messy labour court cases too. Being a US company, rather than settling quietly the various actions will be contested, no doubt, and there will be an avalanche of bad news.....
16 January 05
Financial IT Systems Engineer
.....Citigroup was making hay while the NPL problem sun shone and the authorities were very unhappy. Reportedly and very hush hush, there were annual conferences involving MoF, FSA and BoJ about Citi and at the Seventh Conference in 2001 it was decided to act as sufficient evidence had been obtained. By the time of the Eighth Conference in 2002 the die was cast and then the timetable moved into the complications of pressuring UFJ into MTFG without giving Citi a chance by suitable private banking inspection hamstringing. That would all tie up with the Analytica heard story of problems in 1999, ignored warnings in 2000, First Inspection in 2001, cat watching mouse in 2002, Second Inspection in 2003 and the death blow in 2004. Obviously like any decent national financial supervisory agency, it is all a question of supporting the home team: Japan is fully up to best practice on that score!.....
04 February 05
Foreign Private Banker
As long anticipated, the NTA is now in at Citigroup and showing particular interest in some 1,000 'Family Office' type accounts where there was an off-shore trust, larger amounts and the strong suspicion of tax monkey business. The NTA is methodically going through the lot. Its position is that as these were promoted out of the Marunouchi Branch the economic reality is that the Branch was an on-shore establishment and these off-shore trusts are taxable as being onshore. Furthermore, trusts are, of course, see through structures in Japan and thus the issue is the amount of income and capital gains accruing to the beneficiary or otherwise to the settlor and the tax amount due and then the subsidiary issue for the clients of making restitution claims against Citigroup etc on being made to go through the expensive trust settlement etc hoops for the liability of a lot of back tax demanded etc. A certain foreign bank had its FSA inspection that ended uneventfully. Not so much going on at that bank under its careful management, it would seem. [This 'certain foreign bank' subsequently over mid-2005 accomplished an exemplary and discreet low profile withdrawal from Private Banking in Japan fully in line with its quality management credentials.] It seems that a certain other foreign bank is going strong on its Private Banking Project III with reports of 40 staff and currently actively interviewing around 60/70 ex-Citigroup staff for employment to take numbers to close to 100. It would seem to be the Project I and Project II story of private banking in a profitability no man's land being repeated. Otherwise there are reports that the FSA is coming down heavily on life assurers re compliance issues, solvency margins etc. It all seems to be very even handed between foreign and domestic players so that there is indeed a "No!" to all the past history and practice of double standards.
04 March 05
Head Bureaucrat may have started out quite liberal, when he was transferred from MoF, but he is gradually switching to an exclusionary stance as a Japanese bureaucrat in the hot seat internationally. Koizumi promised Bush in June 2002 to double FDI, but nothing very much has happened since, in fact pretty much zero to be precise, and the US financial interests want to open up Japan, Commodore Perry-style, for their highly profitable style of business practices: working by the explicit regulations and ignoring the bureaucrat implicit policy intents in the large Japanese market. As alluded to previously, there are heavy duty political undercurrents here, as the Bush regime is peculiarly open to vested interest pressures re the way the US political system works generally and also to a general US domination and oligopolistic policy intention in key overseas markets too re the neocon tendency in particular. Give the foreign, notably US, firms an inch and they take a mile has been the message received loud and clear by the Head Bureaucrat, so there is going to be continuing friction. Although Big Bang was announced 1997 by Hashimoto and supposed by now to have been more or less completed, the Hashimoto promise of a 'Free, Fair, Global' Policy has not been achieved as is much the same case for the US, when the shoe is on the other foot. There are these US pressures and JP Morgan Chase intending apparently to re-enter private banking in Japan next year is part of that as is Lehman playing around with the Livedoor Event. Obviously landing 29.6 percent of NBS, on top of what was already held, complete with a natty financing package by a series of purchases between 08:30 and 09:00 suddenly one morning required some considerable preliminary organisation and should have been notified properly re the intent and spirit of the Takeover Bid rules. That does not mean arguing for the Fuji Sankei management as they are a lot of shitheads to use a slightly blunt, kusotare no renchu, expression: moving the Shikanai family owners out of pole position without due social courtesies, having the listing but not thinking of any defensive measures when they were so exposed in slowly trying to restructure the equity holdings of the cats cradle of cross holdings etc. The judge in the injunction action case now has a nasty balancing act between Establishment interests versus TSE interests re shareholder rights with the current high level of foreigner shareholding. Ex-PM Mori only got into Waseda University through the back door and was only good for rugby and his one intellectual achievement was to have been a member of the Debating Society, yubenkai, of which fact he is still inordinately proud. He got his first job at Fuji Sankei also through the back door, but was so useless that even at Fuji Sankei he had to be moved on and he was switched to Nippon Kogyo Shinbun - the now-Fuji Sankei Business i - and is a pretty bad case all round. That is the Establishment as represented by the LDP + Fuji Sankei! A certain other foreign bank's Private Banking Operation appears to be run out of Singapore without any particular reference to Japanese conditions and is indeed an accident waiting to happen as they pile on the personnel costs regardless of the revenues. Trying to hire Citigroup Private Banking Unit staff shows a particular determination to make a true pig's ear of things as it is an obvious red rag to the FSA bull. You have to give credit to their brave intention to hit a brick wall. A third closure, the brick wall of the piece, is indeed timetabled.
11 April 05
Foreign Banker (semi-retired)
Agree with the Analytica outline summary of the Citigroup Private Bank Japan Event as regards the overall Phase I 1986 - 1995 and Phase II 1997 - 2004 sequencing and the particular day-to-day details mentioned. It would all seem to agree with the known trends of US financial + corporate behaviour against a backdrop of Japanese successful financial regulatory reform. The key question is why was the fateful decision made to ignore the initial ripple of adverse market comment leading finally to the FSA 2001 Inspection and its findings and measures, which were then again ignored along with the growing avalanche of adverse market comment. Citigroup Private Bank Japan continued to be run as-was as was so clearly documented in the 2003/04 Inspection findings and measures. The simple answer is that a Phase II business decision was made that the stream of private banking profit may have been suspiciously high, but from the risk/return perspective it was decided to take the profit return and run the regulatory risk. Behind that would have been the specifically US factors of entrenched arrogance + ignorance towards Asia in general and Japan in particular and the New York management being in the bubble of knowing what the top man wanted and it really not being worthwhile to oppose for fear of being set back in the personnel pecking order. The last thing that is required in such circumstances is nay-saying information from locally informed third parties ie those who actually know! The Japanese bureaucrat-style 'playing stupid', tobokete iru, is the best policy in such circumstances and, if it all actually blows up to continue to play stupid, shuffle off the responsibility where possible and hope for the best: corporate and government bureaucracies are remarkably similar, if not identical. However, could also generalise from the particular US perspective of the change in management style of the US financial institutions as a result of the 1990s let-it-rip M&A developments, long-term employment career structures going, what-do-I-get-out-things-short-term attitudes and the end of institutional memory. The Zweig book on Walter Wriston is worth reading as an overly long, however, summary of what happened. Personally, in 1963, joined a leading US bank straight out of university after specialising in Japanese studies and got a good training in banking in an old world style ethical environment and then started to do tours of duty in Asia. Eventually moved banks as an Asia/Japan hand and became heavily involved in Japanese financial regulation at one point as the legal envelope was pushed out on novel financial products and ended up in negotiation with the top-level decision maker at MoF at the time: still a very respected individual in semi-retirement now. Have always taken a relaxed and commonsense view towards such matters seeing the point of view from both the US and the Japanese side. Believe that generally and particularly in Japan as it was once so memorably encapsulated, "Japan is like any other country, only more so," if one does one's homework, behaves in an old-fashioned sense of gentleman-to-gentleman with all the social niceties and courtesies common to all countries, then at the end of the day everything works really quite smoothly. The new US attitudes really work against gentleman-to-gentleman courtesies and first started to hit the problem in the early 1980s after joining a more go-getting type of organisation in financial services. Immediately on getting the feet under the desk, there was a clear problem of confusing a simple certain banking service between the then-rigid compartmentalisation of banking and non-banking (in this case travel agency of all things) and getting the problematic simple certain banking service switched out of travel agency and into the bank: the general attitude was why bother as it had always been like that since opening post-War in Japan. "If the Japs had lived with it under MacArthur, they could continue to live with it now," seemed to be the slightly unsophisticated, if not even downright crude, message. Then very clearly remember having set up a meeting at some considerable expense of time and effort for the then-New York hero visiting Tokyo to meet the then-MoF working level key man over a certain important pushing out of the legal envelope problem. The MoF small talk was about somebody in the New York Head Office, but this was immediately countered with the blunt assertion that the somebody was of little consequence and not in the hero's reporting line and quite 'out-of-the-loop'. It would have been very little effort to have smiled sweetly said that the somebody was known and respected, an additional personal anecdote added, and that the good wishes would be passed on, prior to entering into the big talk of the whatever financial product, then winding up with thanks for past co-operation, request for future co-operation etc etc. Instead, there was obvious MoF puzzlement, incomprehension and, worse than a wasted meeting, a negative atmosphere on parting from the expensive restaurant and its discreet table carefully chosen for the lunch. It is really not a matter of coming down on Citigroup in Japan per se as Citi is merely the convenient illustrative example to hand, but fairly obviously have had something of a ring side seat on the always high profile Citi in Asia/Japan and at one time got more than a spectator's seat on account of an ex-Citi specialist team that was hired en bloc by the first employer and then caused some very considerable and very unfortunate fire fighting problems throughout Region Asia. Originally, and also early post-War, Citibank was a very respected bank and the 'international' US bank at the cutting edge of banking developments with such things as pushing the envelope of the legally possible in liaison with the US regulatory authorities in such areas as Certificates of Deposit, CDs, and other such then-novel products in the 1950s and 1960s. There were problem areas later, however, the sovereign risk problem in Latin America was very high profile and very nearly bankrupted Citi in the late 1980s and much lower profile a number of problem specialist teams, one of which led to the fire fighting problems. Citicorp, as it then was under Reed, was somehow 'saved' higgledy piggledy with a lot of flattering write-ups in the gung ho US business press only eventually to be reversed into Travelers under Reed/Weill and then finally 'lost' with Reed himself being edged out and the Travelers people getting very much into the driving seat and whatever remained of the old Citicorp institutional memory and esprit de corps from the old days going. The general industry emphasis now is on compliance. The particularly bizarre recent undertaking made by Citigroup to the FSA to have a full and functioning matrix structure of clear New York Product Heads and a Tokyo Country Head indicates the extent of the underlying industry wide problems. Previously esprit de corps and institutional memory would have ensured sufficient senior management communications for the big picture ethical and legal issues to be kept under control and internal + external audits to keep the detailed debitor and creditor bookkeeping under control. Thus the current high emphasis industry wide on 'compliance' is evidence that the old standards no longer apply. With the go-getter business school types that are now around with their working 'partners' there is resistance to an overseas posting as disruptive of the double income and of the Head Office career contacts. Overseas ends up as being marginalised in the corporate management mind and headed up by people prepared to take the job swinging through on short tours of duty with no underlying contact with the local society. There is then a growing reliance on local hires, both Japanese and increasingly a menagerie of other nationalities, who are typically personnel floating around the market often 'resting' between such 'opportunities' having considerable experience on paper, a re-assuringly fluent command of financial English for the key interview and an acute awareness of the weakness of the dysfunctional matrix system. As good learners, such personnel quite naturally adopt the US-style what-do-I-get-out-things-short-term attitudes often with a crystal clear intention to profit from some new management project over the typical three plus year window of near free-spending budget opportunity over the new project start-up hiring to its closure firing cycle. There are active information networks so that an unsuspecting expat in Tokyo on an unrealistically short start-up hiring mandate can quickly put together a surprisingly large team of apparently suitably experienced staff and quickly get back to Head Office with even a bonus for his outstanding efforts long before the closure firing cycle kicks in. There are many concrete examples known in the market about such US-style 'hit and run' raids as they may be best described. The long term Asia hands of the old days that had some genuine local knowledge, stayed to become part of the Establishment scene in Japan and could stop such matrix, hit and run raids etc nonsense dead in its tracks are all long gone. Could run off a list of names, but what is the use. They trained on the job in the corporate ethos in Head Office and then worked diligently until retirement, often in the country as a matter of choice having some personal connection through family and/or university study, and there was 'institutional memory' and 'cultural sensitivity' to use new terms as indicative of the problems themselves as is the new term 'compliance'. Business school graduates are indeed a kind of off-the-peg staff option that can be slotted in easily to fill sudden gaps, but are hardly long-term team stakeholders. Compliance is trying to pick up the pieces of a stakeholder governance system now reduced to shareholder governance and a quite new concept. It is a reductionist analysis of capitalism and so suffers from being an example of the Fallacy of Composition. Heading towards full retirement must hold equity and live off dividends, but have very little trust in this New Age Capitalism of shareholder governance and equity empowerment. Morgan Stanley had a staff of less than 100 in 1963, if the figures are correctly remembered, and then exploded in size as investment banking took off. The other investment banks were much the same sizes then: some expanded grossly to their current, or past, prominence and some, to their credit, did not. With high salaries conventionally paid and consequently exploding expenditure on the gross expansion, revenue had to be jacked up and clients, both corporate and individual, took the strain by ending up being systematically gouged. Like some perpetual motion machine, it will all come to a shuddering halt is the frank opinion and like everyone else hope not in one's own time 'apres moi le deluge'. The New Age is transient and reads rather like Marx's famous description of capitalism being much ceaseless change, insubstantiality and loss of social bearings. The very corporate names mean little after the income/golden parachute generating M&A deals are completed: either they are the new names dreamed up with a Latin dictionary in one hand and paper and pencil in the other, enpitsu name name as the Japanese so graphically say, or even worse, they are the old names but fundamentally different. Citigroup is an example: the old Travelers now sets the pace. The man who put it all in motion is largely out of things now not keeping a fatherly eye on his creation and seemingly more interested in his social activities in New York judging from the newspapers reports of his being on the trustee board of this and that, while the fat cats at Citi are taking home pay of around USD10m pa, despite all the recent problems under their watch. Reportedly, the heir apparent at Citigroup departed in 1998, turned around Bank One that then got reversed into the itself-just-merged JP Morgan Chase. The new JP Morgan Chase is now the same kind of Citigroup financial supermarket being run by the new Bank One boys, Citigroup at one remove as it were, and the JP Morgan name is used the more prominently to camouflage Bank One exactly as for the Citi/Travelers case. It has even been called aptly enough Citigroup West. In these circumstances, there is the suspicion that per Analytica and the Allfinanz Reform, 1985 - 2015, in Japanese financial services that the Oriental tortoise could indeed outrun the Occidental hare.
21 October 05
The second FSA inspection of the Citigroup Private Bank Group in Japan was launched in early November 2003 and in late May 2004 the overall outline results of the inspection were given to Citigroup for comment. However, at that point there were absolutely no indications of the sanctions that would be eventually be imposed. Essentially by early June 2004, everything within the Private Bank Group had come to a dead halt and Kitade was relieved of his duties as Group Head being replaced by the well-established Citigroup Private Bank man from Region EMEA, the Lebanese Samir Raslan, but Kitade remained as an advisor on account of his detailed knowledge only to leave finally in August. Japan was a single region reporting directly to New York and on a par with the other regions: US, Latin America, Asia/Pacific and Europe/Middle East/Africa. This was very much in the Kitade style of only ever talking to the top decision makers, and notably Scaturro, in New York. The Analytica information source saying that Japan had been put under Singapore and therefore into Asia/Pacific in 1999 sounds possibly wrong as from personal knowledge in August 2000 Region Japan was very definitely back, if ever away, in existence as a single country region on a par with the US and that appeared to be a source of some considerable pride to all concerned. Kitade graduated from Sophia University in March 1971 and directly joined Citibank the following month so he was unusually a real Citigroup 'puropa'. His first job was as an assistant in forex trading and he quickly made his mark and progressed through the very Japanese-style Citigroup generalist course for high flyers eventually making it to Head of Corporate Finance of the Citi commercial banking operation. Private Banking was relaunched in 1997 and Kitade was made the Head: this was seen as something of a demotion, sasen, by many people at the time and had even been explained by some supposed unfortunate difficulties in corporate finance at the time. Of course, even as late as 1997, 'private banking' was not well understood in Japan and one may well say that Kitade astutely saw an opportunity for his very particular talents. Certainly he launched an extra-ordinary advertising campaign with a punch copy along the lines of 'only bother calling us if you are worth at least JPY100m in hard financial assets'. This Kitade style was very different to the advertising style of the run of the domestic banks and caused a considerable buzz and stir at the time. The Group marketing campaign seemed to be successful with around 3,000 clients in August 2000 rising to around 12,000 or some 8,000 families by the peak that was essentially over the September 2003 - March 2004 half. Total AUM, Assets Under Management, were approx JPY1tr or approx USD10bn with profits being cranked up an extra 20 plus percentage points each year and year-in-year-out at that, despite all the ups and downs in the Japanese economy. It was indeed a fountain of money and this caused some friction within the Citigroup Private Bank operation worldwide as it made the other, possibly slightly more conventionally managed operations, look quite pedestrian in comparison and may have been the proximate cause of the final fiasco: while it has been generally published in the press that the trigger for the FSA inspection was the Sugino Gakuen Event and the direct complaint to the FSA by Sugino Gakuen, it was widely rumoured within the Group reportedly that the trigger was in fact a whistle blower's anonymous letter sent, it was surmised, from Citigroup Hong Kong to the FSA. In any event, the January to June 2004 period was the crisis period internally as senior management slowly realised the gravity of the problems developing as a result of the FSA inspection and its progress. Hot shot US lawyers were drafted in to argue the Citi case with the FSA and then even New York senior staff started appearing in Tokyo with Scaturro visiting himself in March it was said, if the memory serves correctly. That was when Whitehead was relieved of his duties, becoming an advisor and finally leaving in June. It was the Whitehead style, his hot shot US lawyers and his then ending up as a Director at Columbia Law School New York, lecturing apparently on financial compliance among other things, that particularly upset the FSA according to the apparently well informed article in the magazine, Aera, in the Asahi Shinbun stable ['"nihon no ginko nara arienai" to kinyucho wa nigarikitte iru' - '"just an impossibility for a Japanese bank," said the FSA man looking as sour as vinegar' (Aera 08 November 04 p69)]. Anyhow the FSA sanctions were announced in mid-September 2004 and the operation then immediately moved from its 'holding mode' to the 'closure by end-September 2005 mode'. Clients wanting to continue receiving private banking services were moved to the domestic banks or to the foreign banks offering private banking and those that did not were often simply moved to Citibank retail. Citigroup Private Bank has extensive private banking service off-shore offerings tailored for Japanese nationals' needs in a fully Japanese language environment out of New York, Honolulu, Hong Kong and Geneva, but that was all strictly separate to the offering of private banking services on-shore Japan. Peterson who replaced Whitehead strikes one immediately as a very careful, orderly and systematic type of person having been an internal auditor at one point in his Citi career. Prince was entirely right in choosing such a person to deal with the fiasco: the ideal choice that should have been made somewhat earlier one might even say with the benefit of hindsight. Therefore the market rumours to the effect that there are controversial efforts to preserve something of the Japanese Citi private banking business from the wreckage by switching the original on-shore clients to off-shore and servicing them by fliers can be ruled out 100 percent. A certain other foreign bank's private banking story is also relevant as an example of an unfortunate trend of developments under foreign management that appears never to be entirely up to speed with market and regulatory developments on the ground in Japan that are apparently so difficult to understand for non-Japanese overseas. There have been three phases of private banking at the certain other foreign bank and not two as Analytica interestingly misunderstood: Phase I 1998 - 2000, Phase II 2000 - 2002 and Phase III 2004 and still current. Phase I was the somewhat chaotic effort through its trust bank with Head Office total support, Phase II was a slightly mistaken hole-in-the-wall effort to save something and/or anything, clients, branding etc, from the Phase I wreckage masterminded by the then Country Head Japan through the on-shore bank, but only with the liaison support of private banking Head Office and was very limited in scale of personnel numbers and time frames and so was completely overshadowed and even confused with Phase I. It was even mistakenly seen at one point as a reverse of the Phase I closure decision. This caused much confusion in the market at the time. As a hole-in-the-wall effort, 'skunk works', with therefore identifiable responsibility not being laid off elsewhere and generating only heavy losses, it did notably lead eventually to the very respected, long term and fully 'tatamisiert' Japan resident Country Head sadly leaving Japan for his home country after so many honourable years of sterling service to European/Japanese financial understanding. Finally Phase III is the current considerably more sedate and better paced effort through the on-shore bank + securities company with the total support of Head Office being originally launched as a project in mid-2003 at the highest level with the website going live mid-2004 and the formal opening for business launch party in late 2004. By all reports there has been a limited, but significant, take-up of ex-Citi private bankers. The clumsy product straddling of banking + securities is something of an open invitation to compliance problems as has been so widely commented on in Japanese private banking circles. Time will tell.
16 December 05
The order was made 17 Sep 04 to close the Marunouchi Branch and the Nagoya, Osaka and Fukuoka Offices by 30 September 05 and that was achieved by Citibank under the supervision of the Agency and there is nothing further to comment on. No Agency follow-up report has been released and no comment can be made or assistance given as regards any follow-up interviewing requested. There have been reports that the then-Minister, Takenaka, went to New York to discuss the matter with the US FRB authorities but that is incorrect information, goho. Cross border co-ordination is handled under the BIS 'Basel Concordat' 1983, that is a kind of gentlemen's agreement to cooperate and exchange information in the interests of maintaining international financial order. It may be termed the 'BCCI Rules' in this respect in the market, but the Agency does not recognise that term as such. The actual content of any such Citigroup Private Bank Japan Event-related regulatory discussions is not published as a matter of confidentiality. Any comments made by Agency representatives in press conferences etc were within the terms of the understanding on confidentiality and smooth working with the US authorities. Very little more can be said by the Agency. Any lessons learned are learned in such events by the institutions concerned and not by the authorities involved. Citibank should be contacted for comment, advice made to its customers and the various PR statements made from time to time.
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