Thomas Hoover - The samurai strategy

"I wish I could believe that."

"Well, I suppose there are many things about Dai Nippon that need to be explained more fully. I look forward to seeing you next week. We can talk then."

Upon which he advised me just to sit tight. All further communications would be routed through their office uptown. And with that dictum in place, he suddenly had better things to do and said thanks for all my help. There was the sound of some satellite bleeps, then silence.

Welcome to the Brave New World, I thought. Again I had this definite feeling the DNI rodeo had just begun.

By then Jack was nearing terminal exhaustion. I passed along Noda's cryptic refusal to lift a hand, advised him to make a statement tomorrow that the U.S. financial markets could be dangerous to everybody's health, and helped him into a cab for his aide's place uptown. The evening was fizzling out with nobody left at the bar but regulars. Thus I went home alone to check in with Amy and then drift off into a very unsettling dream.

My nightmare was over by morning. America's was just beginning.

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.