Funny thing about investor confidence: often as not it relies more on faith than facts. Give it a little unsettling heat, and it can just melt away. Belief turns to fear, then blind panic.
Insight number two: the bigger you are, the more scared you tend to get. So what appeared to be a sudden Japanese loss of conviction regarding the U.S. Treasury's ability to meet its standing obligations received close attention from the world's bankers, from Zurich to Hong Kong. The Japanese securities outfits just kept dumping, and nervous phone inquirers from locales as diverse as the White House and Red Square were all advised that everybody was "in a meeting and will get back to you." As a natural consequence the world's major financial players succumbed to a terminal case of nerves.
When the bond markets finally reopened on Wednesday, Treasury's thirty-year issue had scooted up four full interest points. There was still a market for Uncle Sam's IOUs-everything on this planet will move for a price-but buyers were wary. They wanted their newly perceived risk sweetened considerably.
Predictably rates on corporate and municipal bonds did a similar tango north, leaving America's conservative investors wondering what hit them. In fact, a lot of scheduled corporate debt offerings were scuttled to await more settled times and lower rates.
The dollar also stayed on the critical list. Everybody was worried the U.S. Treasury might just rev up the printing presses to produce enough greenbacks to pay off all the foreigners who wanted their money back. Since Paul "tight money" Volcker-who probably would have thrown his robust torso onto the ink to prevent that from happening-was now gone, there was nobody at the Fed with a real commitment to holding back the flood.
And the stock market. People weren't starting to call this Black November for nothing. A lot of players feared that the higher rates would hobble the economy, a perfect excuse to head for the exits while the getting was good. As Henderson liked to observe: psychology is a fundamental too. The next day the Dow sank another two hundred points; the day after that a hundred more. (Where had those sellers been two days before?) The fourth and fifth days it slowed, heaved an audible sigh of exhaustion, and sort of peered up out of the bunker to see if the bombing runs had let up. The downward pressure was still evident, but it was finally losing some of its steam.
Yours truly did a lot of thinking as the week wore on, while the country appeared to wobble on the brink of unprecedented disaster. I also conferred now and then with Jack O'Donnell and with Henderson in between their appearances on TV chat shows. Although Bill's bearish reading of the nation's estate had been vindicated well beyond what even he had envisioned, I can report he took small pleasure in his newfound celebrity; he was increasingly miserable over his own missed opportunities in the financial casino. Jack, for his part, had gained a profound appreciation of the helplessness of government to intervene when fear and greed seize the marketplace.
My personal ruminations on the situation turned out to be too Machiavellian for anybody to entertain seriously. Question: If you wanted to pull all your money out of the U.S., is this how you'd do it? Answer: No way. Instead you'd go about it gradually, a little at a time, in order not to stampede the markets and cause exactly what was happening now.
Ergo, I concluded, this isn't real. Noda just wants every investor in the world to assume there's a Japanese pullout underway.
But why the grandstand play? Sure, he'd made a pile, but he didn't seem like a guy who had to sweat his mortgage payments. Nor did this kind of market manipulation require a building in midtown Manhattan and a computer setup to rival NORAD headquarters. Something more had to be coming. And the only thing I could think of was that Noda's something had a lot to do with my profession.
This was not a welcome piece of prognostication to loose upon the world. Since the financial markets already had plenty of problems on their plate, there wasn't all that much interest in speculating about the next course. Consequently nobody made the slightest attempt to man the ramparts for what was ahead. Our financial battleship had been stopped dead in the water and its engines disabled, but nobody was even bothering to prime the guns. This couldn't be an all-out attack. Right?
Wrong. The stage was now set for Noda's real move. The following Saturday I was summoned to Dai Nippon's midtown fortress where I watched my crazy theory become reality. Before anybody in our shell-shocked financial centers had time to digest what had happened, Matsuo Noda-his Dai Nippon Eight-Hundred-Year funds underwritten through a syndicate of Japanese banks and insurance companies led by the Dai-Ichi Credit Corporation, Ltd. of Tokyo-hit the beach.
In the days to come I did manage to assemble a rough outline of how Noda pulled off his brilliant opening feint. It was elegant, and to savor it fully requires a quick peek at his reserves-Japan's bankbook.
Start with personal savings, the hundreds of billions being squirreled away by individual Japanese. Then add to those monies the assets of Japanese pension funds, private savings organizations with several hundred billion dollars to lend out. Next come insurance companies and corporations, similarly awash in loose cash. Taken together, the total amount of excess capital in Japan is now well over five trillion dollars.
If all those zeros befuddle you as much as they do me, try thinking of it like this: a trillion dollars is the size of the annual U.S. budget. So if the Japanese regulators opened the floodgates and let all that money roll, its citizens have the ready bucks to finance our government's entire budget-Lockheed, stockpiles, and pork barrel-for at least five years using just what's in their mattresses.
As it happens, all this Japanese cash has become an important, nay, indispensable, component of the American financial scene. We and the Japanese are like an old married couple: they're the wife who scrimps and saves, we're the husband who borrows and squanders. The middlemen who rifle her purse and ship the proceeds to us are, increasingly, Japanese investment firms.
At least half a dozen major Japanese securities dealers with offices in New York run big bond departments. The foremost of these is, of course, Nomura Securities International, the world's largest brokerage house (having aced out Merrill Lynch). With over two hundred billion dollars in customer accounts, Nomura is now a primary dealer in U.S. Treasury issues, meaning they can buy directly from the government and sell to their clients. And since Treasuries pay several interest points better in return than Japan's miserly savings accounts, their customers back home think they're getting a terrific deal. Little wonder Japanese investors finance a full third of America's budget overdrafts these days.
Another major player is Daiwa Securities America, which also underwrites federal paper on its own. Nor should we overlook Nikko Securities and Yamaichi Securities, both handling money in the tens of billions. These outfits and others are well past the beachhead stage of entry into the world capital markets. They're entrenched; they're big; and they know how to play hardball. Were they involved in Noda's assault? Nobody ever knew for sure. But you figure it out.
Banks. As it happens, the biggest one in the world is Japanese. The Dai-Ichi Kangyo Bank, Ltd. of Tokyo has unceremoniously reduced Citicorp to second banana. Rounding out the top five worldwide are Fuji, Sumitomo, and Mitsubishi. And worldwide means everywhere. Japan controls ten percent of the U.S. banking business, a quarter of all British banking. Of the ten largest banks in the sovereign state of California, four are Japanese. Japan in brief has become banker to the world, with more ready money than anybody else, and it also has a battalion of financial samurai who know the game.
What makes these Japanese players especially powerful is the kind of bucks they represent. It's called hot money-cash lent out short-term and therefore subject to immediate withdrawal. Instead of tying up their overseas bankroll for years, they stick to offshore investments that can be called in tomorrow. At home Japan invests for the long horizon, but abroad the bulk of the money is short. Hot money.
Since foreign investors normally pick up well over half of a given Treasury refunding, the paralysis when Japan began recalling its hot money, thereby spooking buyers worldwide, was as predictable as the sunrise. Matsuo Noda didn't have to be a Rhodes Scholar to realize how much mileage there'd be in a big Japanese sell-off program and a "no comment" from his dealers.
Here's how he orchestrated the details. Apparently it had all been very Japanese, very consensus. A few phone calls, then a lot of meetings over green tea. Later on, some late nights with sake. Noda, thanks to his new clout, had been in the driver's seat from the start. The money managers in Tokyo were all feeling the heat over demands by investors that they participate in the multiple Eight-Hundred-Year funds he'd floated. All across Japan people were starting to ask whether their savings were out there waving the flag too. A lot of those managers were starting to get edgy, so Noda thoughtfully struck a deal, a little consensus.
Okay, hold your monies, but let's get organized. When the next Treasury collection plate comes by, don't roll over any more short-term U.S. T-bills and don't take a piece of the next sale of long bonds. In fact, that's the day you begin to divest. Staggering losses? No problem. I just happen to have everybody's portfolio insulated with futures contracts. Sell away, and even when the price plummets, nobody's gonna lose a yen. In fact, you can have a piece of the currency windfall I've set up. Apparently everybody shook hands on it, or whatever they do in Japan nowadays.
Consequently none of the big Japanese houses in New York had to take a lot of risk. The sellers were covered by Noda's rate contracts, which I later discovered he'd passed along (at cost) to anybody who needed them. The rest he sold himself for a hefty profit. So in the course of his play, he incidentally raised several billions in additional operating capital for Dai Nippon while fully protecting the home team.
When the dust had finally settled, it turned out he didn't actually liquidate very much Treasury paper after all. He didn't need to. In fact Japan dumped only about eight percent of its holdings. If you think about it a minute you realize they couldn't possibly have hoped to divest everything they had in dollars. What would they do with all that cash? Loan it to Brazil?
Veterans of world finance will tell you there were already precedents for this kind of Japanese muscle. Back in the mid- eighties, Nomura Securities had unsheathed its financial sword and totally controlled the Eurobond markets for about a fortnight. They were just letting everybody know they were in town. So there was nothing particularly unprecedented about a little number whereby a handful of Japanese banks and securities firms could, by concerted action, bring the U.S. financial system to its knees.
Although I'd been convinced from the very first that Matsuo Noda had engineered the whole move, I had no hard proof. Besides, what was I supposed to do? No laws were broken. He was playing strictly by the rules. So I just took cover like everybody else and watched the marketplace disintegrate. My main preoccupation was a growing suspicion that Noda was now moving up his battery of guns for the next round of shelling.
I was right. His Treasury sell-off had merely been a demonstration of firepower. Its effectiveness must have given confidence that his beachhead was secured, since he came ashore at the end of the week to take personal command of the real landing.
He and his general staff hit town quietly and with no fanfare on Thursday, spent Friday in a strategy session, and on Saturday took over the computerized command HQ on Third Avenue. That afternoon Tanaka called and ordered me (very politely but curtly) to assemble my records and come uptown. The operation was being consolidated and Noda-san wanted me coordinated. From now on I would be working out of their offices.
This was it. Just what I'd been waiting for. At last I could confront the bastard, one-on-one. No way was I going to be part of the big assault I saw directly ahead.
My first look at the revised operation uptown confirmed my worst fears. The technical analysts had been replaced by a new set of troops: money men. Open collars were gone, supplanted by a lot of business-school types wearing thin black ties. Tanaka's office had been moved off to the side; the corner office now belonged to Dai Nippon's four-star commanding general: Matsuo Noda. After I'd cleared security, that's where I was led.
"Mr. Walton, how good to see you again." He looked up from a printout, his silver hair perfectly groomed. "I do hope today is convenient for you."
"This is going to be brief." I ignored the chair he rose to adjust for me. "I'm only here to advise you that my participation is officially terminated as of this moment. I'll be sending you a final invoice next week. You can find yourself another attorney."
"But your work has scarcely begun." He appeared to be mildly puzzled, as though I'd just made a small misstatement about the weather or some such. "We expect your participation to be crucial."
"Surely you're joking." I was turning to leave.
"Mr. Walton." He shifted the printout around and shoved it across the desk. "Contrary to what you may presume, we are here to help this country. You might wish to look over our program for the near term."
"This I've got to see." I came back and studied it for a few seconds… then stared back at him.
"Impossible." I finally realized he was serious. "Whatever you're thinking, I'll tell you right now you don't have a chance. These outfits have lawyers. Hundreds of them."
"Ah, but that's why you are on our staff. This is your specialty." He smiled. "Remember the Book of Five Rings by the swordsman Miyamoto Musashi? In it he describes the three kinds of attack. There is the Ken no Sen, where you move first and catch your opponent unprepared; next is the Tai no Sen, whereby your initial move occurs a split second after your opponent's; and finally there is the Taitai no Sen, in which you and he attack at the same instant. What has happened up until today might be likened to the Ken no Sen. We have made sure that nothing was anticipated. Very soon, however, we will have to move to the Tai no Sen, responding with lightning speed to the moves of those who would thwart us. Miyamoto Musashi declared correctly that if you are attacked with force, you must counterattack with even greater force and thereby upset momentarily your opponent's rhythm. That moment can mean victory, but only if you are totally prepared." He leaned back. "We must be totally prepared."
"Why in hell would I want to help you? I guess you didn't hear me. I've just resigned." I turned for the door. "Besides, nobody could pull off what you're planning. You're going to have battalions of attorneys moving against you."
"I expect that." He stopped smiling. "But that area is your responsibility now, Mr. Walton. A good swordsman does not think, he acts. Intuitively."
"And if I refuse?"
"You cannot possibly."
"Try me."
"Only you can handle this, Mr. Walton. Betray us, and you may well witness the disappearance of America as an industrial nation. The time is now or never."
That zinger gave me pause. He meant it. But before I had a chance to tell him he was completely crazy, he went on to sketch out what he claimed was his objective. How he planned to address the American "crisis" and resolve it.
Let me tell you my first impression of Matsuo Noda's scenario. It was legal, it was legit, and it was-as Joanna's teenage niece used to describe notable phenomena-totally fucking awesome.
What's more, he wanted me to stay on as tail-gunner. The truth? I felt the disorientation of a kid who'd been fooling around in the Soap Box Derby suddenly being handed a slot in the Indianapolis 500.
The most astonishing part of all was, I had the feeling he just might pull it off.
You're right. I should have said no, not on your life, this is way out of my league, never in a million years…
Instead I said I'd think about it.
Good, he said. Why didn't I stick around till Monday and get a feeling for the operation?
I didn't shake his hand. I just walked out and poured myself a cup of green tea from the huge urn there in the middle of the floor. Walton, you idiot, how did you get yourself into this?
Which is when I spotted a sporty looking lady way across on the other side of the floor, over by the climate-controlled NEC mainframe. Something about her seemed vaguely familiar. Definitely not DNI staff. Wearing jeans, dark hair in a nice designer cut, handled herself like a mover. Not to mention a world-class bottom inside those tight, shapely Calvins. From all appearances she actually seemed to be second-in-command. She was reading the riot act to Tanaka about something to do with the computer, had the self-important little fucker bobbing and weaving. Who was that? Hadn't seen her around here before.
Well, now, no time like the present to head on over and check into this. A fellow gaijin. Could be she'll explain what in hell's going on. Is Noda real?
Suddenly she turned around, saw me, and stopped. I stopped. We both just stood there trying to remember. She hit pay dirt first, but I was only microseconds behind.
Want to know my first thought, my very first thought? Matsuo Noda, you son of a bitch, you're even smarter than I'd given you credit for. You've hired the best, the very best.
"Is this how you pick up your women these days, Matt? Given up on vegetable stands?" She was walking toward me wearing a smile. I tried to grin back. "How are you, Matthew? Good to see you've still got your hair. Well, most of it."
"Tam Richardson, I don't believe this. Now I know it all is a dream. Please tell me you were kidnapped. None of this is really happening, right? It's just a very big, very bad dream. We'll all wake up tomorrow and go to the beach."
"Welcome aboard, partner." She stuck out her hand. "It's going to be a wild trip."
"No kidding." I looked her over as I took her hand. Nice and warm. Time had treated her well. Very well. "How long have you known Noda?"
"Less than a month." She was checking me over too. Wonder how I was doing. "How long have you been helping him?"
It occurred to me that we both should have been using that classic hooker response when the guy asks his young companion how long she's been in her particular field of endeavor and she replies, "Long enough to know better."
"Few months now. Noda is pretty impressive." I tried to sound casual. "Not to mention persuasive."
"That he is."
"Well, let's have a toast to winning this." I turned to the urn. "How about some tea, Professor?"
"Love it."
"Tam, let's just hope these guys don't suddenly decide to eat us alive." I passed it over. "What do you think our chances of survival are?"
That one startled her. I got the impression she was half thinking the same thing. Then she managed a thin laugh.
"We'll eat them first if they try."
"You still talk tough. I always told you you should have been a lawyer."
But she was right. Once the cards are dealt, you play to win.
Which is exactly what I planned to do. Since my own part was still down the road, that weekend I just sat in their offices watching spellbound as Noda and Dr. Tamara Richardson reviewed the data and put together the financial details. Next, a lot of coded telexes were sent out to pile up somewhere in Tokyo with instructions for routing of the funds.
After I'd digested his opening move, I did have occasion to ask the boss a few pointed questions. Such as, wasn't he at all nervous that Wall Street might rebound before he could get rolling? He replied, correctly as usual, that the total collapse in the financial markets would last for a while. Even though the dollar was still down for the count (over forty percent), he figured only the most intrepid foreign speculators would go plunging into the American stock market looking for bargains. As for American investors, most of them, including the institutions, were still in shock. He rightly forecast that the herd mentality of the Street hadn't been repealed. War stories of '87 were going around and nobody wanted to make the textbooks as a fool. Better a little profit forgone than more money lost. The mutual fund managers, most of whom had been caught with their pants at half-mast, were devoting their energies that weekend to composing creative explanations.
Events Monday proved him to be essentially on target. There was an eerie quiet over the financial landscape. Everybody was waiting for somebody else to try breathing life back into the corpse.
Then a few analysts noticed something peculiar. Anonymous buy orders were coming in, more and more, for stocks in the sector hardest hit, high tech. Maybe it was bargain hunters, but the buyers weren't any of the "growth" mutual funds that might have been expected to lead the action. In fact, many of those hotshot managers were relieved to part with some of the dogs they'd ridden down that long, lonesome decline of the week before.
Gradually the prices of certain securities began to edge up in this early thin trading, enticing more and more holders to "sell on strength." What issues? First off, anything to do with computers. Of course there weren't all that many hardware manufacturers left around by then, after the shakeout and mergers of the mid-eighties, but somebody was buying heavily into the few that remained. They were also actively purchasing little software outfits. Those stocks had taken a heavy beating over the past week, so prices were at an all-time low for most.
Other industries they started to nibble at were telecommunications, aerospace, biotechnology. They seemed to be looking for outfits with substantial R amp;D operations: the focus was on creativity, growth sectors, the sunrise industries.
Of course, what this mysterious new buyer was really doing was snapping up outfits loaded with labs and Ph.D.'s. Dr. Richardson and my new client Matsuo Noda had DNI acquiring companies short on competent management and market share but long on research, innovation-the one thing we were still halfway good at. Looked at differently, what Dai Nippon was really buying was underused brainpower, the American smarts currently going to waste thanks to inept corporate management.
Explanations began to sprout all over the place-from the "Heard on the Street" column in the Journal to Dan Dorfman, a guy with a bloodhound's nose for Wall Street shenanigans. But the hard truth was nobody could put it together. Who could have? The play was too ambitious even to imagine.
You guessed it. With the trillions and trillions now at its disposal, Japan was about to take charge of America's future.