Bank of Japan injects Y2.5 tril into markets as Lehman Japan also files for bankruptcy

Tuesday 16th September, 12:59 PM JST

TOKYO —

The Bank of Japan injected 2.5 trillion yen into markets Tuesday as Japan scrambled to calm fears about a financial crisis after U.S. investment bank Lehman Brothers filed for bankruptcy both in the U.S. and Japan.

Lehman Brothers Japan Inc filed for bankruptcy protection with the Tokyo District Court following the collapse of its parent firm Monday, marking the second largest corporate failure in terms of debts in the postwar period in Japan.

The Japanese unit of U.S. securities house Lehman Brothers Holdings Inc, together with its Japanese holding company, invoked the Civil Rehabilitation Law.

According to a private credit research agency, the combined liabilities of the two firms totaled about 3 trillion yen as of Aug 31.

‘‘Combined liabilities are estimated at 3 trillion yen, though it may vary,’’ Tokyo Shoko Research said in a statement, adding that the failure of Lehman was the ‘‘second largest in the postwar period.’‘

Shortly after the filing, Japan’s Financial Services Agency ordered Lehman Brothers Japan to suspend operations for 12 days through Sept 26, as the agency received a report from the Japanese unit saying that it may fall into default in the long run.

The FSA also ordered the unit to retain certain assets within Japan in order to prevent Lehman assets here from being transferred to its other units and affiliates outside Japan as well as to protect investors here.

According to the FSA, the Japanese unit manages about 1.2 trillion yen worth of assets, mainly for institutional investors.

Following the move, the Tokyo Stock Exchange said Tuesday morning it will suspend trading by Lehman Brothers Japan at the bourse from Tuesday for an indefinite period of time.

The Finance Ministry also said it has decided to delist Lehman Brothers Japan as a special market participant or primary dealer in the government bond market for 11 days, starting Tuesday.

The U.S. investment bank opened the Tokyo branch in 1986 and expanded its business by taking stock orders for foreign investors and through bond market profits.

The Japanese unit of Lehman made its name known after providing 80 billion yen to Japanese Internet service firm Livedoor Co to help purchase Nippon Broadcasting shares in 2005.

Meanwhile, Financial Services Minister Toshimitsu Motegi sought to allay fears by saying the impact on Japanese financial institutions was limited.

“So far, we haven’t confirmed any signs that Japanese financial institutions are seriously affected,” he said, adding officials will “raise alert levels” to closely monitor the situation.

Japan’s central bank pumped 1.5 trillion yen into money markets even before trading began to prepare for possible volatility. In the afternoon, the Bank of Japan added another 1 trillion yen to money markets.

Tokyo stocks plummeted Tuesday, with the key Nikkei index diving nearly 5% to its lowest level in more than three years, as the failure of major U.S. securities house Lehman Brothers Holdings Inc stunned investors and discouraged them from buying risky assets such as stocks.

The 225-issue Nikkei Stock Average lost 605.04 points, or 4.95%, from Friday to 11,609.72, its lowest closing level since July 8 in 2005 when it closed at 11,565.99.

With Monday being a holiday here, Tuesday was the first day for investors to react to the news about Lehman’s collapse—and the stunning news that Bank of America had taken over Merrill Lynch for about $50 billion.

Investors also are worried about the fate of American Insurance Group, the world’s largest insurer. It was fighting for its survival after downgrades from major credit rating firms, adding pressure to AIG as it seeks billions of dollars to strengthen its balance sheet.

The Bank of Japan issued a statement vowing to take measures to maintain stability in the country’s financial markets. Cabinet ministers, along with the central bank chief, were also holding an emergency meeting.

“The Bank of Japan will closely watch development surrounding the latest U.S. financial institutions and its impact, and will continue to take appropriate measures to maintain smooth settlement and stability in the financial market,” Bank of Japan Gov Masaaki Shirakawa said in a statement.

Some of the Japanese lenders to Lehman Brothers said Tuesday that their actual exposure to Lehman would be little changed from their earlier projection or even smaller.

Aozora Bank Ltd, which is among the top lenders to Lehman, said its projected exposure could be “less than $25 million,” or “less than 6% of the $463 million exposure reported in Lehman bankruptcy filings, as it assumes “reasonable recoveries” against Lehman’s Japan unit and market pricing for recoveries against its U.S. parent.

Chuo Mitsui Trust Holdings Inc said it has a total of 15 billion yen in loans to Lehman Brothers and its Japan unit, while regional Chiba Bank said it’s lending to Lehman totaled $47 million (4.98 billion yen), and will announce its impact on earnings projections.

Lehman’s failure comes as Bank of America announced it will snap up Merrill Lynch & Co Inc in a $50 billion all-stock deal and reports in the Wall Street Journal and The New York Times that insurance giant American International Group was seeking $40 billion in emergency funds to help it avoid a credit rating downgrade.

Finance Minister Bunmei Ibuki predicted Tuesday that Lehman’s bankruptcy will not seriously damage the Japanese financial system despite some institutions’ exposure to the fourth-largest U.S. securities house.

‘‘Considering the conditions of each financial institution’s self-owned capital, we do not have to worry about the Japanese financial system, though those entities have extended loans to Lehman,’’ Ibuki said at a press conference.

Ibuki said he, together with Economic and Fiscal Policy Minister Kaoru Yosano, told other cabinet ministers that Tokyo is ready to react flexibly on this matter and to communicate with international and domestic stakeholders.

Ibuki said Group of Seven countries are open to talk about this issue anytime. The G-7 groups Britain, Canada, France, Germany, Italy, Japan and the United States.

Prime Minister Yasuo Fukuda, Chief Cabinet Secretary Nobutaka Machimura, Bank of Japan Governor Masaaki Shirakawa, and Economy, Trade and Industry Minister Toshihiro Nikai discussed with Ibuki and Yosano Japan’s response to the Lehman collapse in an emergency meeting Tuesday morning.

Fukuda vowed to coordinate with financial authorities in other countries and told the ministers to closely watch market movements, according to Yosano and Ibuki.

Ibuki downplayed the yen’s sharp advance relative to the U.S. dollar after the bankruptcy, saying the fluctuations are ‘‘within expectations.’’ He said the ongoing Tokyo stock plunge does not seem to be ‘‘panic’’ selling.

Yosano said, ‘‘We have to calmly accept fluctuations of 2 to 3 yen as levels decided by market players.’’ He also said a sharp drop in Tokyo stocks Tuesday morning is ‘‘not surprising,’’ since the Tokyo market always traces moves in Europe and the United States.

On overall U.S. economic conditions, the economics minister said he expects the U.S. economy to ‘‘gradually return to a recovery path in the fall of next year or later.’‘

The Japanese economy relies on U.S. demand for its exports, but the adverse effects from the deteriorating U.S. economy ‘‘will not suddenly get worse further to the extent they cannot be handled’’ because of the Lehman failure, Yosano said.

‘‘We will just see the sequel of the U.S. subprime crisis, which broke out last year,’’ he said.

Machimura told a separate news conference that the negative impact on Japanese financial entities has so far been limited, but warned that the faltering U.S. economy may affect the Japanese economy later.

The government’s top spokesman said the government will steadily carry out an emergency economic package to stem repercussions on Japanese small businesses and consumers.

Wire reports

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Latest 15 of 61 Total Comments Show All

Xennon at 07:11 PM JST - 16th September

I have a short position. Kaching!

Sweet Nessie. I have been following it all day. KACHING x2!
ReikiZen at 07:27 PM JST - 16th September

I always love how everyone all of a sudden becomes experts in the Stock Market. It is always easy to blame the CEO for everything. It is much more complicated then simply being greedy as everyone so loosely throws out there. Not saying they aren't partly to blame but the fact that there are other factors involved which contributed to this. The continued poor performance in the housing industry is likely one culprit.

Holdings in the Insurance Industry and the continued bare market which no one would admit to hasn't helped either. Investment firms like Merrill Lynch of which I used to have stock in got in over their head. This in part may be why they decided on the merger as were in similar shape as Lehman Brothers. They likely panicked and didn't want to take the chance of not having a buyer if the bottom fell out.

During the housing boom loans were being given out like water with no accountability. People that got loans in many cases should never had in the first place. When the market turned south the banks were getting back more foreclosures then they could handle. Mortgage lenders were scrambling for creative ways to keep people in their homes but the sub-prime market was already teetering on the brink.

Now here is where things get complicated. As the war in Iraq continues to suck the US economy dry. A debt which is reaching galactic heights, and a dollar which is about as worthless as the paper it's printed on. The US is looking more like a starving lion on the savanna then the economic powerhouse it once was and likely never will be again. The rest of the world has loaned the US a pair of crutches to bolster the worthless dollar while we prepare for the eventual meltdown which is slowly coming to pass.

China and Japan currently hold over $1.7 trillion in US currency and US-based assets and can hardly afford to have the ground cut out from below the dollar. The US debt increases some 1.93 billion per day and is currently at 9,689,987,709,740.14 and counting ouch! In the last fiscal secession figures indicate that foreign investment is drying up and the world is no longer eager to purchase our lavish debt. The only thing the Federal Reserve can do is raise interest rates to attract foreign capital or let the dollar fall in value.

The problem, of course, is that if the Fed raises rates, the real estate market will collapse even faster which will strangle consumer spending and shrivel GDP. In other words, we are at the brink of two separate but related crises; an economic crisis and a currency crisis. That means that the unsuspecting American people are likely to be ground between the two mill-wheels of hyperinflation and shrinking growth. In real terms, the economy is already in recession.

The growth numbers are regularly massaged by the Commerce Department to put a smiley face on an under-performing economy. Industrial output continues to flag while millions of good paying factory jobs are being air-mailed to China where labor is a mere fraction of the cost in the USA. At the same time, foreign investment will move to more promising markets in Asia and Europe causing a steep rise in interest rates. This is bound to be a stunning blow to the banks which are low on reserves ($44 billion approx) but have generated $4.5 trillion in shaky mortgage debt in the last 6 years.

What makes this worse is that Lehman Brothers has assets in access of 600 billion. So it likely will take years to sort this out and no bank will be able to bail them out. This is just the tip of the iceberg though as AIG problems if they go south well likely send the US economy into hell! Therefore making US a third world country almost overnight lol. AIG assets are so large and widespread that likely no one in God's green earth will be able to stop the earthquake that will likely ensue. Is it any wonder why the foreign central banks are so skittish about dumping the dollar?

No one really relishes the idea of a quick slide into a global recession followed by years of agonizing recovery. Maybe this whole 2012 thing was right after all. If that's the case then good thing I am learning Japanese as I may need it in the future as the USA sells it's soul to the underworld lol. In closing this makes me wonder if having a few more centuries of experience would have been any different or would we be any more wise? Hard to say but one thing is for sure we really should have payed more attention in history class as it is coming back to bite us in the ass!
JoeBigs at 08:46 PM JST - 16th September

Slowly but surely Bush doctrine beings to show its worth. As more and more US Companies begin to fold the full scale of this Administration shows its show self.

What took hundreds of years to produce a single Administration and it`s doctrine destroys.

Can this Country keep pace with the rest of the World with another Bush in the White House?

No, I say it is time for a change, vote out these leeches and get some new blood in there.

Bush Cheney no more/ Obama 08!
Samuraiiki at 08:56 PM JST - 16th September

Another one bites the dust! Lost of posts are so right. Greed takes away what little money poor Joe could make. The way economies are and goverment operate is on the same principle: give to the rich more and to the one who is in low wages less. My belief is, some money needs to be flowed into the poor because the poor will always have a need to spend the little they have. Money goes up from the poor to the rich. So, as long as there is money put back in the poor's hands, there will always something to flow back up. if you expect rain to fall, some must evaporate from the ground. Otherwise there will be nothing to fall back down. On another note: banks will collapse like dominoes. And, if the Japanese spread rumors like they always do, they could do some heavy damage to themselves.
yabits at 09:40 PM JST - 16th September

Hard to say but one thing is for sure we really should payed more attention in history class as it is coming back to bite us in the ass!

Excellent post, ReikiZen!

Santayana's saying about those who forget history has never been more true. We have been here before.
jaybeeb at 10:29 PM JST - 16th September

Well done ReikiZen. I couldn't agree more.
helloklitty at 10:55 PM JST - 16th September

this goes all the way back to the dot.com bubble bursting. the govt. intervened just like they are intervening again. we didn't take our lumps back then, so we're taking them twofold now. the u.s. has to realize it's becoming a socialist country. this is why the bankers took all these stupid risks - they know they'll be bailed out. if we were truly capitalist, bankers would have been a lot more careful about managing risk and we wouldn't be in this mess

finally, no bailout for lehman bros. - that's the way it should be
usaexpat at 11:54 PM JST - 16th September

People need to relax, the markets are so jittery and banks and investment houses are failing as shareholders go into an all out panic. It's self fulfilling profecy and the media hype just keeps driving the panic.
motytrah at 04:56 AM JST - 17th September

ReikiZen, you make a lot of good points, but they don't support the initial argument that we shouldn't blame the CEOs.

There are plenty of large banks that are doing fine out there despite the mortgage crisis in the US. I think the long and short of it is that the CEOs decided the risk/exposure they were willing to take. Institutions that followed traditional/conservative standards will weather this period just fine. In fact some are doing quite well stepping in for the companies that have fallen. Those that choose to risk it should pay a price, and the CEOs shouldn't be rewarded for their mistakes.

Ultimately the CEO choose the direction for the company and sealed their fate.

You're absolutely right about history repeating. Even worse, it's not like people weren't warning wallstreet about it. Warren Buffett has been warning people the problems in the housing/lending system since 2003.
rjdsr at 05:38 AM JST - 17th September

No one really relishes the idea of a quick slide into a global recession followed by years of agonizing recovery.

I do. It means mad profit.

http://www.youtube.com/watch?v=JaKkuJVy2YA
MPNiea at 12:38 PM JST - 17th September

The Democrats should have taken President Bush's advice in 2003 when he fought for the establishment of a committee to regulate financial institutes like Freddie Mac, Fannie Mae, and Lehman Bros.

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&partner=permalink&exprod=permalink

Of course, Democrat presidential nominees for the past 12 years have been in their pockets. It is not a surprise that they blocked all efforts to cease any proposals and bills to regulate these institutes:

http://www.liveleak.com/view?i=efa_1221617258

Have fun looking over that.
jaybeeb at 11:31 PM JST - 18th September

helloklitty, fascist might be a more accurate description.

'Fascism should rightly be called Corporatism, as it is the merger of corporate and government power.' -Benito Mussolini

motytrah, the blame rests equally on those people who bought into the delusion. I have no pity for greedy people - be that the CEO or the McMansion owner.

MPNiea, smoke and mirrors my friend.
rjdsr at 03:48 AM JST - 20th September

"The Democrats should have taken President Bush's advice"

Absolutely! Bush has spent 8 years trying to undo the democRAT damage, but what they did in the 90s was too great. If the democRATs are allowed to come back to power things will only get worse. We need to focus on Republican values: Jesus, bombing Iran, stopping abortion.

This is Palin. This is the cure for America. Join us or die.
jaybeeb at 09:34 PM JST - 20th September

Could we please cut the crap with this ridiculous US election commentary. It's totally irrelevant who gets elected.
Sarge at 10:37 PM JST - 20th September

Now is a good time to buy.