The Samurai Strategy

  CHAPTER THIRTEEN

  Funny thing about investor confidence: often as not it relies more onfaith than facts. Give it a little unsettling heat, and it can justmelt away. Belief turns to fear, then blind panic.

  Insight number two: the bigger you are, the more scared you tend toget. So what appeared to be a sudden Japanese loss of convictionregarding the U.S. Treasury's ability to meet its standing obligationsreceived close attention from the world's bankers, from Zurich to HongKong. The Japanese securities outfits just kept dumping, and nervousphone inquirers from locales as diverse as the White House and RedSquare were all advised that everybody was "in a meeting and will getback to you." As a natural consequence the world's major financialplayers 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 amarket for Uncle Sam's IOUs--everything on this planet will move for aprice--but buyers were wary. They wanted their newly perceived risksweetened considerably.

  Predictably rates on corporate and municipal bonds did a similar tangonorth, leaving America's conservative investors wondering what hitthem. In fact, a lot of scheduled corporate debt offerings werescuttled to await more settled times and lower rates.

  The dollar also stayed on the critical list. Everybody was worried theU.S. Treasury might just rev up the printing presses to produce enoughgreenbacks to pay off all the foreigners who wanted their money back.Since Paul "tight money" Volcker--who probably would have thrown hisrobust 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 theflood.

  And the stock market. People weren't starting to call this BlackNovember for nothing. A lot of players feared that the higher rateswould hobble the economy, a perfect excuse to head for the exits whilethe getting was good. As Henderson liked to observe: psychology is afundamental too. The next day the Dow sank another two hundred points;the day after that a hundred more. (Where had those sellers been twodays before?) The fourth and fifth days it slowed, heaved an audiblesigh of exhaustion, and sort of peered up out of the bunker to see ifthe 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 thecountry appeared to wobble on the brink of unprecedented disaster. Ialso conferred now and then with Jack O'Donnell and with Henderson inbetween their appearances on TV chat shows. Although Bill's bearishreading of the nation's estate had been vindicated well beyond whateven he had envisioned, I can report he took small pleasure in hisnewfound celebrity; he was increasingly miserable over his own missedopportunities in the financial casino. Jack, for his part, had gained aprofound appreciation of the helplessness of government to intervenewhen fear and greed seize the marketplace.

  My personal ruminations on the situation turned out to be tooMachiavellian for anybody to entertain seriously. Question: If youwanted 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 atime, in order not to stampede the markets and cause exactly what washappening 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 seemlike a guy who had to sweat his mortgage payments. Nor did this kind ofmarket manipulation require a building in midtown Manhattan and acomputer setup to rival NORAD headquarters. Something more had to becoming. And the only thing I could think of was that Noda's somethinghad a lot to do with my profession.

  This was not a welcome piece of prognostication to loose upon theworld. Since the financial markets already had plenty of problems ontheir plate, there wasn't all that much interest in speculating aboutthe next course. Consequently nobody made the slightest attempt to manthe ramparts for what was ahead. Our financial battleship had beenstopped dead in the water and its engines disabled, but nobody was evenbothering 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 followingSaturday I was summoned to Dai Nippon's midtown fortress where Iwatched my crazy theory become reality. Before anybody in our shell-shocked financial centers had time to digest what had happened, MatsuoNoda--his Dai Nippon Eight-Hundred-Year funds underwritten through asyndicate of Japanese banks and insurance companies led by the Dai-IchiCredit Corporation, Ltd. of Tokyo--hit the beach.

  In the days to come I did manage to assemble a rough outline of howNoda pulled off his brilliant opening feint. It was elegant, and tosavor it fully requires a quick peek at his reserves--Japan's bankbook.

  Start with personal savings, the hundreds of billions being squirreledaway by individual Japanese. Then add to those monies the assets ofJapanese pension funds, private savings organizations with severalhundred billion dollars to lend out. Next come insurance companies andcorporations, similarly awash in loose cash. Taken together, the totalamount of excess capital in Japan is now well over five trilliondollars.

  If all those zeros befuddle you as much as they do me, try thinking ofit 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 thatmoney roll, its citizens have the ready bucks to finance ourgovernment's entire budget--Lockheed, stockpiles, and pork barrel--for atleast 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 theJapanese are like an old married couple: they're the wife who scrimpsand saves, we're the husband who borrows and squanders. The middlemenwho 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 inNew 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 dollarsin customer accounts, Nomura is now a primary dealer in U.S. Treasuryissues, meaning they can buy directly from the government and sell totheir clients. And since Treasuries pay several interest points betterin return than Japan's miserly savings accounts, their customers backhome think they're getting a terrific deal. Little wonder Japaneseinvestors finance a full third of America's budget overdrafts thesedays.

  Another major player is Daiwa Securities America, which alsounderwrites federal paper on its own. Nor should we overlook NikkoSecurities and Yamaichi Securities, both handling money in the tens ofbillions. These outfits and others are well past the beachhead stage ofentry into the world capital markets. They're entrenched; they're big;and they know how to play hardball. Were they involved in Noda'sassault? Nobody ever knew for sure. But you figure it out.

  Banks. As it happens, the biggest one in the world is Japanese. TheDai-Ichi Kangyo Bank, Ltd. of Tokyo has unceremoniously reducedCiticorp to second banana. Rounding out the top five worldwide areFuji, Sumitomo, and Mitsubishi. And worldwide means everywhere. Japancontrols ten percent of the U.S. banking business, a quarter of allBritish banking. Of the ten largest banks in the sovereign state ofCalifornia, four are Japanese. Japan in brief has become banker to theworld, with more ready money than anybody else, and it also has abattalion of financial samurai who know the game.

  What makes these Japanese players especially powerful is the kind ofbucks they represent. It's called hot money--cash lent out short-termand therefore subject to immediate withdrawal. Instead of tying uptheir overseas bankroll for years, they stick to offshore investmentsthat can be called in tomorrow. At home Japan invests for the longhorizon, but abroad the bulk of the money is short. Hot money.

  Since foreign investors normally pick up well over half of a givenTreasury refunding, the paralysis when Japan began recalling its hotmoney, thereby spooking buye
rs worldwide, was as predictable as thesunrise. Matsuo Noda didn't have to be a Rhodes Scholar to realize howmuch mileage there'd be in a big Japanese sell-off program and a "nocomment" from his dealers.

  Here's how he orchestrated the details. Apparently it had all been veryJapanese, very consensus. A few phone calls, then a lot of meetingsover green tea. Later on, some late nights with sake. Noda, thanks tohis new clout, had been in the driver's seat from the start. The moneymanagers in Tokyo were all feeling the heat over demands by investorsthat they participate in the multiple Eight-Hundred-Year funds he'dfloated. All across Japan people were starting to ask whether theirsavings were out there waving the flag too. A lot of those managerswere starting to get edgy, so Noda thoughtfully struck a deal, a littleconsensus.

  Okay, hold your monies, but let's get organized. When the next Treasurycollection 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. Ijust happen to have everybody's portfolio insulated with futurescontracts. Sell away, and even when the price plummets, nobody's gonnalose a yen. In fact, you can have a piece of the currency windfall I'veset up. Apparently everybody shook hands on it, or whatever they do inJapan nowadays.

  Consequently none of the big Japanese houses in New York had to take alot of risk. The sellers were covered by Noda's rate contracts, which Ilater discovered he'd passed along (at cost) to anybody who neededthem. The rest he sold himself for a hefty profit. So in the course ofhis play, he incidentally raised several billions in additionaloperating capital for Dai Nippon while fully protecting the home team.

  When the dust had finally settled, it turned out he didn't actuallyliquidate very much Treasury paper after all. He didn't need to. Infact Japan dumped only about eight percent of its

  holdings. If you think about it a minute you realize they couldn'tpossibly have hoped to divest everything they had in dollars. Whatwould they do with all that cash? Loan it to Brazil?

  Veterans of world finance will tell you there were already precedentsfor this kind of Japanese muscle. Back in the mid- eighties, NomuraSecurities had unsheathed its financial sword and totally controlledthe Eurobond markets for about a fortnight. They were just lettingeverybody know they were in town. So there was nothing particularlyunprecedented about a little number whereby a handful of Japanese banksand 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 hadengineered the whole move, I had no hard proof. Besides, what was Isupposed to do? No laws were broken. He was playing strictly by therules. So I just took cover like everybody else and watched themarketplace disintegrate. My main preoccupation was a growing suspicionthat Noda was now moving up his battery of guns for the next round ofshelling.

  I was right. His Treasury sell-off had merely been a demonstration offirepower. Its effectiveness must have given confidence that hisbeachhead was secured, since he came ashore at the end of the week totake personal command of the real landing.

  He and his general staff hit town quietly and with no fanfare onThursday, spent Friday in a strategy session, and on Saturday took overthe computerized command HQ on Third Avenue. That afternoon Tanakacalled and ordered me (very politely but curtly) to assemble my recordsand come uptown. The operation was being consolidated and Noda-sanwanted me coordinated. From now on I would be working out of theiroffices.

  This was it. Just what I'd been waiting for. At last I could confrontthe bastard, one-on-one. No way was I going to be part of the bigassault 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: moneymen. Open collars were gone, supplanted by a lot of business-schooltypes wearing thin black ties. Tanaka's office had been moved off tothe side; the corner office now belonged to Dai Nippon's four-starcommanding general: Matsuo Noda. After I'd cleared security, that'swhere 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 foryou."

  "This is going to be brief." I ignored the chair he rose to adjust forme. "I'm only here to advise you that my participation is officiallyterminated as of this moment. I'll be sending you a final invoice nextweek. 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 somesuch. "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 thedesk. "Contrary to what you may presume, we are here to help thiscountry. 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'rethinking, I'll tell you right now you don't have a chance. Theseoutfits have lawyers. Hundreds of them."

  "Ah, but that's why you are on our staff. This is your specialty." Hesmiled. "Remember the Book of Five Rings by the swordsman MiyamotoMusashi? In it he describes the three kinds of attack. There is the Kenno Sen, where you move first and catch your opponent unprepared; nextis the Tai no Sen, whereby your initial move occurs a split secondafter your opponent's; and finally there is the Taitai no Sen, in whichyou and he attack at the same instant. What has happened up until todaymight be likened to the Ken no Sen. We have made sure that nothing wasanticipated. Very soon, however, we will have to move to the Tai noSen, responding with lightning speed to the moves of those who wouldthwart us. Miyamoto Musashi declared correctly that if you are attackedwith force, you must counterattack with even greater force and therebyupset momentarily your opponent's rhythm. That moment can mean victory,but only if you are totally prepared." He leaned back. "We must betotally prepared."

  "Why in hell would I want to help you? I guess you didn't hear me. I'vejust resigned." I turned for the door. "Besides, nobody could pull offwhat you're planning. You're going to have battalions of attorneysmoving against you."

  "I expect that." He stopped smiling. "But that area is yourresponsibility now, Mr. Walton. A good swordsman does not think, heacts. Intuitively."

  "And if I refuse?"

  "You cannot possibly."

  "Try me."

  "Only you can handle this, Mr. Walton. Betray us, and you may wellwitness the disappearance of America as an industrial nation. The timeis now or never."

  That zinger gave me pause. He meant it. But before I had a chance totell him he was completely crazy, he went on to sketch out what heclaimed 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 waslegal, it was legit, and it was--as Joanna's teenage niece used todescribe notable phenomena--totally fucking awesome.

  What's more, he wanted me to stay on as tail-gunner. The truth? I feltthe disorientation of a kid who'd been fooling around in the Soap BoxDerby suddenly being handed a slot in the Indianapolis 500.

  The most astonishing part of all was, I had the feeling he just mightpull it off.

  You're right. I should have said no, not on your life, this is way outof 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 feelingfor the operation?

  I didn't shake his hand. I just walked out and poured myself a cup ofgreen 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 otherside of the floor, over by the climate-controlled NEC mainframe.Something about her seemed vaguely familiar. Definitely not DNI staff.Wearing je
ans, dark hair in a nice designer cut, handled herself like amover. Not to mention a world-class bottom inside those tight, shapelyCalvins. From all appearances she actually seemed to be second-in-command. She was reading the riot act to Tanaka about something to dowith the computer, had the self-important little fucker bobbing andweaving. Who was that? Hadn't seen her around here before.

  Well, now, no time like the present to head on over and check intothis. A fellow _gaijin_. Could be she'll explain what in hell's goingon. Is Noda real?

  Suddenly she turned around, saw me, and stopped. I stopped. We bothjust stood there trying to remember. She hit pay dirt first, but I wasonly microseconds behind.

  Want to know my first thought, my very first thought? Matsuo Noda, youson 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 onvegetable stands?" She was walking toward me wearing a smile. I triedto grin back. "How are you, Matthew? Good to see you've still got yourhair. 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 tomorrowand go to the beach."

  "Welcome aboard, partner." She stuck out her hand. "It's going to be awild trip."

  "No kidding." I looked her over as I took her hand. Nice and warm. Timehad treated her well. Very well. "How long have you known Noda?"

  "Less than a month." She was checking me over too. Wonder how I wasdoing. "How long have you been helping him?"

  It occurred to me that we both should have been using that classichooker response when the guy asks his young companion how long she'sbeen in her particular field of endeavor and she replies, "Long enoughto 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. "Howabout some tea, Professor?"

  "Love it."

  "Tam, let's just hope these guys don't suddenly decide to eat usalive." I passed it over. "What do you think our chances of survivalare?"

  That one startled her. I got the impression she was half thinking thesame 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 alawyer."

  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 downthe road, that weekend I just sat in their offices watching spellboundas Noda and Dr. Tamara Richardson reviewed the data and put togetherthe financial details. Next, a lot of coded telexes were sent out topile up somewhere in Tokyo with instructions for routing of the funds.

  After I'd digested his opening move, I did have occasion to ask theboss a few pointed questions. Such as, wasn't he at all nervous thatWall Street might rebound before he could get rolling? He replied,correctly as usual, that the total collapse in the financial marketswould last for a while. Even though the dollar was still down for thecount (over forty percent), he figured only the most intrepid foreignspeculators would go plunging into the American stock market lookingfor bargains. As for American investors, most of them, including theinstitutions, were still in shock. He rightly forecast that the herdmentality of the Street hadn't been repealed. War stories of '87 weregoing around and nobody wanted to make the textbooks as a fool. Bettera little profit forgone than more money lost. The mutual fund managers,most of whom had been caught with their pants at half-mast, weredevoting their energies that weekend to composing creativeexplanations.

  Events Monday proved him to be essentially on target. There was aneerie quiet over the financial landscape. Everybody was waiting forsomebody else to try breathing life back into the corpse.

  Then a few analysts noticed something peculiar. Anonymous buy orderswere 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 ofthe "growth" mutual funds that might have been expected to lead theaction. In fact, many of those hotshot managers were relieved to partwith some of the dogs they'd ridden down that long, lonesome decline ofthe week before.

  Gradually the prices of certain securities began to edge up

  in this early thin trading, enticing more and more holders to "sell onstrength." What issues? First off, anything to do with computers. Ofcourse there weren't all that many hardware manufacturers left aroundby then, after the shakeout and mergers of the mid-eighties, butsomebody was buying heavily into the few that remained. They were alsoactively purchasing little software outfits. Those stocks had taken aheavy beating over the past week, so prices were at an all-time low formost.

  Other industries they started to nibble at were telecommunications,aerospace, biotechnology. They seemed to be looking for outfits withsubstantial R&D operations: the focus was on creativity, growthsectors, the sunrise industries.

  Of course, what this mysterious new buyer was really doing was snappingup outfits loaded with labs and Ph.D.'s. Dr. Richardson and my newclient Matsuo Noda had DNI acquiring companies short on competentmanagement and market share but long on research, innovation--the onething we were still halfway good at. Looked at differently, what DaiNippon was really buying was underused brainpower, the American smartscurrently going to waste thanks to inept corporate management.

  Explanations began to sprout all over the place--from the "Heard on theStreet" column in the Journal to Dan Dorfman, a guy with a bloodhound'snose for Wall Street shenanigans. But the hard truth was nobody couldput it together. Who could have? The play was too ambitious even toimagine.

  You guessed it. With the trillions and trillions now at its disposal,Japan was about to take charge of America's future.