Tue, Jan 22, 2002 page19

• Enron and Daiei -- two different failures

  Though it won't be pretty or pain-free, the US has let Enron fail. But Japanese officials have allowed Daiei to survive and may have delayed the inevitable

  • By William Pesek Jr / BLOOMBERG
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  You'd hardly expect bankers to herald the failure of two of the world's most venerable institutions as milestones. Yet that was the spin when Barings PLC blew up in 1995 and Yamaichi Securities did the same in 1997.

  Letting Barings, a 233-year-old bank that financed the Napoleonic Wars and housed accounts for British royalty, and Yamaichi, a 100-year-old bond house and one of Japan's Big Four brokerages, go bust was thought to prove the wisdom of capitalism.

  

  An Enron employee sits with his belongings outside company headquarters in Houston, Texas, in December.

  PHOTO: BLOOMBERG

  The weak died; the system worked. Congratulations were in order.

  Recently, two more marquee-caliber institutions blew up -- one American, one Japanese. Washington called Enron Corp's collapse a milestone; Tokyo felt the same way about its handling of Daiei Inc's meltdown. Which was a real victory for global capitalism? Enron, albeit marginally.

  It won't be pretty or pain-free, but the US allowed Enron to fail. Company executives in Houston called everyone in their Rolodexes for help, including senior US Treasury and White House officials. Enron felt the wads of cash it had tossed at politicians, including President George W. Bush, entitled it to a Long-Term Capital Management-like bailout. Washington said no.

  "Companies come and go," said Treasury Secretary Paul O'Neill. "Part of the genius of capitalism is people get to make good decisions or bad decisions, and they get to pay the consequence or to enjoy the fruits of their decisions. That's the way the system works."

  Japan's system is doing exactly the opposite. Take last week's announcement of a probable 420 billion-yen (US$3.16 billion) bank bailout of Daiei Inc, a household-name supermarket chain.

  Daiei is one of Japan's doomed companies. It's barely hanging on now and probably won't last another two years. The challenge for the world's second-biggest economy is dumping the failed "Japan Inc" strategies of the past. That means not protecting businesses that should fail. Or letting banks -- and aiding them -- keep bad loans on their books indefinitely.

  In short, it means becoming more of a capitalist economy, and less of a socialist one.

  That's not to say that the US system is perfect -- far from it. Any economy that breeds a disaster like Enron, allows it to prosper and heaps praise at executives who fooled the world for years has major problems.

  In recent decades, the US has preached the gospel of free markets here in Asia. Since the 1997 financial crisis, Washington has lectured Asia for its crony capitalism, dodgy corporate governance and poor transparency. Yet where was that the corporate governance where Enron was concerned? Or the transparency? Corporate America is looking just a bit hypocritical at the moment.

  Chat with a businessperson here in Asia these days, and you'll hear a similar observation: Even after Enron, Wall Street is still buying into the sales pitches of the likes of Amazon.com Inc and Cisco Systems Inc and their creative accounting schemes.

  The US, many here say, should look at its own problems and stop lecturing others.

  Nevertheless, what we've seen in the US in recent weeks are market forces exacting their judgment. While it's little comfort to employees screwed out of their 401(k) money, it was the market that decided the winners and losers where Enron was concerned. In Japan, the government is still doing it.

  It's not hard to understand why Daiei was saved from ruin. The supermarket chain, which opened its first outlet in 1957, symbolized Japan's post-World War II boom. It rose up to serve the nation's exploding consumption society and became Japan's top retailer. (It's now No. 2, behind Ito-Yokado Co.) Letting it fail, Tokyo feared, might have slammed fragile consumer and business confidence.

  Truth is, all Japan did was add to the nation's bad loan problems. Daiei couldn't repay its debts before its latest bailout. What makes anyone think they'll be able to pay in six months? Remember that Daiei's business plan was the same as those of Sogo Co and Mycal Corp, both of which already collapsed. The question isn't if Daiei will join them, but when.

  Tokyo is fighting reality, including those who have built a reputation calling for reform. "The economic impact of Daiei going bankrupt would not be small," said Junichiro Koizumi, Japan's prime minister. Daiei, he said, was rescued out of "the eagerness of the private sector and the government's commitment not to cause any kind of financial crisis." By bailing out the worst of Japan's deadbeat companies, Tokyo is increasing the risks of an eventual crisis in Japan. Each week that passes means Japan's bad-loan problem gets worse. And the nation's two-parts-socialism, one-part capitalism policies have left Koizumi and his Cabinet in denial over the depth of the economy's troubles.

  For proof, look no further than this comment by Heizo Takenaka, Japan's minister for economic and fiscal policy: "Companies that are still viable should be reconstructed while the non-viable shouldn't. The market judged that Daiei is a viable company."

  Which market would that be, Mr. Minister: The one populated by investors, or the one Tokyo thinks it controls? Japan doesn't have a monopoly on denial in Asia. In South Korea, Hynix Semiconductor Inc, an operation that should have been allowed to fail long ago, is in talks for yet another bailout. If market forces had their way, Hynix's employees wouldn't have jobs. But since South Korea lacks a social safety net able to absorb Hynix's failure, it's protected.

  Tokyo's problem, of course, is that its economy is loaded with Hynix-like companies that can't compete in the global economy and can't die because politicians won't let them. It's almost unthinkable that Japan would let a giant, Enron-like company collapse. And that's exactly why investors thinking Japan's current reform drive is for real might want to think again.

  True, the swamp that is the Enron affair will get even deeper. At least 10 Congressional committees are beginning investigations into its fantastic fall from grace and the Bush Administration's role, if any, in it. Yet once the dust settles, the US's brand of capitalism -- warts and all -- will still be much purer than Japan's.
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