Japanese bank equity portfolios

Japanese banks - Mitsubishi UFJ Financial Group (MUFG), Mizuho and Sumitomo Mitsui Financial Group (SMFG) - carry a significant amount of their clients' equity on their balance sheets. This relationship dates back to the Meiji era in the late 1800s when Japan began to industrialise. Capital was scarce and banks felt they had a role to support national industry; taking a stake in a borrower showed that their fates were united.

In 2002 the government capped the ratio of equities to tier-one capital at 100%. Now, as then, requiring banks to dump their shareholdings altogether—however laudable—would run the risk of turning a bear market into a rout. Banks own 5% of the value of the country’s stockmarket.

Japanese banks must deduct a percentage of certain unrealised losses from their shareholdings from their tier-one capital. According to UBS, every 10% drop in the Nikkei 225 Stock Average requires banks to raise from ¥13 billion to ¥190 billion apiece to replenish their tier-one ratios to around 7.5%.

captive REIT

In an effort to avoid state corporate income taxes, corporations have been employing captive REITS to save money. Here is how a captive REIT works: A subsidiary pays rent to a REIT, which is entitled to a tax break if it pays its profits out in dividends. The REIT is 99% owned by another subsidiary. The other 1% is owned by at least 99 other employees of the company, since REITS need at least 100 shareholders to gain tax benefits. This subsidiary receives the REITS dividends tax-free, and the company gets to deduct the rent from state taxes as a business expense, even though the money has stayed within the company.

After a boom in REITs in the early 1990s, big accounting firms including Ernst & Young and KPMG LLP figured out that on the state level, they could pair the tax break on REIT dividends with a separate tax rule that allows companies to receive dividends tax-free from their subsidiaries. With the REIT as a subsidiary itself, two rules aimed at avoiding double taxation could be combined to effectively avoid any taxation at all.

Congress created REITs in 1960 as a way to allow smaller investors to put money in a wide portfolio of commercial real estate, spreading their risk. Congress also gave them a tax benefit: REITs aren't subject to corporate income tax on the profits they pay to shareholders as long as they pay out at least 90% of the profits. The shareholders still usually get federally taxed on the dividends, which still count as income for them.

The Sale Leaseback

The sale leaseback enables a company to tap their real estate assets for capital which can then be used to reduce debt or fund expansion. For example, the New York Times recently sold their new headquarters to WP Casey LLC. Under the terms of the transaction, the real-estate investment firm will pay the sum for the 21 floors occupied by the Times, which then will lease the space back for up to 15 years, with an option to buy it back in 2019 for $250 million. The company will use the proceeds from the sale-leaseback to retire $250 million in notes due in 2010.

Sale leasebacks were popular recently when commercial real estate prices reached all time highs. Proceeds from a sale leaseback can lower a firms cost of capital, and keep a company financially nimble, since leases are not technically a debt obligation.

BODACIOUS!

The word originated among Texas wildcatters, who combined the words "bold" and "audacious".

Asian Parsimony and Anglo-Saxon Profligacy

For the last decade our Asian friends have been conducting their finances in a prudent fashion. Radical to Americans, the conservative habits of the ping-pong loving world have allowed the football loving world to spend freely. This is about to change.