Japanese Exposure to Sub-prime Loans May Exceed US$10 billion

"A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

Mark Twain

Talk in Tokyo over the last few months has started to focus on the fixed income products and structures sold by Aladdin Capital Management. The concerns reflect the fact that some of the products may have had underlying exposure to toxic U.S. sub-prime assets.

Charismatic CEO Amin Aladin is a figure of urban legend. His rags-to-riches story from fluent Japanese speaker-cum medical doctor in Kansai to hedge fund manager is well known in the Tokyo investment community. Indeed, he is believed to have an almost permanent presence in Tokyo at the Hotel Okura where he is frequently seen wining and dining Japanese bankers, regional bankers, lifers and other investors. Up until recently his CT based firm managed an estimated US$16 billion in hedge fund and other strategies.

Difficulties in the performance of fixed income arbitrage from the summer has put the spotlight and pressure on these strategies. For example, the Credit Suisse/Tremont Investable Fixed Income Arbitrage Index returned -1.02% in the third quarter of 2007 . This compared with 1.46% in the second quarter of 2007.

Just how much "damage" Japanese investors have suffered is not known for sure. But certainly, there are initial indications that the amounts being mentioned may be substantial and as yet "buried" on bank balance sheets or in off-balance sheet vehicles. And as is often said: "There is no smoke without fire!"

Of course, for long-term investors like pension plans the notion of losses will not necessarily be an issue that requires a mark-to-market recognition. All this makes it quite interesting how investors were clearly seduced into these strategies in the first place - the attraction of high yield (over Treasuries); the comfort that a Japanese speaking "gaijin" was looking after those assets; a stable dollar; and, an environment when fund of hedge fund verhicles were clearly disappointing as far as performance was concerned.

All these factors conspired to help the Aladdin sale - and lets not forget that U.S. investment banks were also aggressive sellers of these products, but without the close network-contacts of Aladin himself.

Bewildered and embarrassed, investors can now expect "new and improved" fund launches by Aladdin and others that focus on buying up these toxic subprime assets for the promise of big returns and better times ahead.

Depending how "deep" the hole of the products sold it is possible that a local distributor may also step up and make a strategic holding to protect their short run investment and commitment as joint distribution partners of Aladdin products and structures. Tough times face the Aladin business model with its heavy dependency on Japanese investors. As Keynes once said: "In the long run we are all dead".
Mahalo!