Provisional translation

Press Conference by Toshimitsu Motegi, Minister for Financial Services

(Excerpt)

September 16, 2008

[Opening Remarks by Minister Motegi]

At today's informal meeting of cabinet ministers, I reported on two matters, namely recent efforts to facilitate financing for small- and medium-size enterprises (SMEs), and the Lehman Brothers issue, which has attracted intense attention since yesterday.

Lehman Brothers, which is the fourth largest U.S. investment bank, expanded the business of securitizing residential and commercial mortgages. However, it faced a business slump as it found it increasingly difficult to securitize mortgages that it purchased, because of the emergence and deepening of the subprime mortgage problem. Although the company has tried to strengthen its financial condition through asset sales and the infusion of capital, its share price has plunged, as the market looked at these efforts critically. The share price, which peaked at 67 dollars per share during the past year, slipped below 10 dollars last week and hit a low of 3.59 dollars on Friday. Through the weekend, financial institutions such as Bank of America and Barclays of Britain considered plans to acquire Lehman Brothers, yet the plans fell through. As a result, Lehman Brothers' U.S. holding company filed for bankruptcy proceedings yesterday afternoon Japan time.

The holding company has a Japanese subsidiary called Lehman Brothers Japan. At 3 p.m. yesterday, the FSA (Financial Services Agency) issued an administrative order necessary for the protection of Lehman Brothers' customers, and issued a business suspension order at 9:30 p.m.

As for the impact on Japanese financial institutions, we have made substantial progress in investigating their exposures to Lehman Brothers, including their holdings of loan claims. Based on the investigation, I reported that in light of the depth of the capital cushion of individual financial institutions, there was nothing to suggest that there would be a serious impact on the management of Japanese financial institutions. I stated that the FSA hopes the U.S. financial institutions will continue to take appropriate steps in order to prevent a serious turmoil in the market, and added that we aim to contribute to stabilizing the global financial markets in cooperation with relevant authorities in Japan and abroad.

After the cabinet meeting and the informal meeting of cabinet ministers, the Prime Minister summoned to his official residence several ministers and other officials, including the Chief Cabinet Secretary, the Minister of Finance, Minister for Fiscal and Economic Policy Yosano, the Minister of Economy, Trade and Industry, the BOJ (Bank of Japan) Governor, the FSA Commissioner, Vice Minister of Finance for International Affairs Shinohara, as well as me, in order to exchange opinions about the Lehman Brothers issue. At the beginning of this meeting, I explained in detail the matters that I mentioned just now. In addition, the BOJ Governor reported on the impact on Japanese financial institutions, which I told you about earlier, and he said that there was nothing to suggest that there would be a serious impact on the management of Japanese financial institutions, in light of the depth of their capital cushion based on the investigation of most of the holdings of loan claims on Lehman Brothers.

However, we have formed a consensus among the relevant cabinet ministers that as the global financial markets remain in a state of turmoil, it is necessary to enhance our vigilance, to maintain close cooperation and communications with relevant authorities regarding U.S. developments related to this matter, as well as the risk management status of financial institutions and various market developments, and to be prepared to take appropriate steps in response to any incident by ensuring cooperation between various government ministries and agencies.

I do not have any further statements to make.

[Questions and Answers]

Q.

You said that the bankruptcy of Lehman Brothers will not have a serious impact for now on Japanese financial institutions. However, I expect that securitization products originated by Lehman Brothers could begin to produce various ripple effects. What do you think of the possibility of the impact spreading?

A.

We will closely watch future developments and strive to collect information. As for the impact on financial institutions, we believe that we have firmly grasped the situation, including the exposures of major banks, regional banks and insurance companies, including life and non-life insurers, as well as major securities groups.

Q.

Did the Prime Minister say anything at the meeting of financial affairs cabinet ministers that was held after the cabinet meeting?

A.

The Prime Minister said, "Now, I have understood the situation," and told us, "I would like relevant ministers to properly maintain contact with each other and make sure to prepare themselves to respond to any incident."

Q.

The Tokyo market has fallen sharply and the yen has appreciated against the dollar in currency trading. The significant turmoil in the capital market has become evident in actual economic data. How long do you expect this turmoil to continue?

A.

It is difficult to predict the future course of the stock market, and from our standpoint as financial authorities, we have refrained from commenting on market movements. In any case, more than anything, it is important that the U.S．authorities continue to do their utmost to stabilize the markets.

Q.

Could you tell me about your frank feeling or opinion regarding the bankruptcy of Lehman Brothers?

A.

As the company is the fourth largest investment bank in the United States, its bankruptcy is a very grave incident. Given that the financial markets are globally connected, it is important for the authorities of individual countries to further strengthen their cooperation. For its part, Japan will also closely watch future developments with a heightened level of vigilance.

Q.

How do you feel about an application for bankruptcy procedures under the Civil Rehabilitation Act by the Japanese subsidiary (of Lehman Brothers) and what impact do you expect?

A.

Regarding the bankruptcy of the Japanese subsidiary, we engaged in information-gathering yesterday, although it was a holiday, with the participation of all senior FSA officials. Focusing on the protection of customers, we issued an order for securing assets at 3 p.m. and a business suspension order at 9:30 p.m. Thus, I believe, at least for now, that we have quickly taken all measures that we can.

Q.

Based on the information so far obtained, how much are Japanese financial institutions exposed to Lehman Brothers, in terms of loan claims on the company and securitization products originated by it?

A.

As you know, we have made it a rule not to disclose how the bankruptcy of an individual financial institution or a non-financial company affects other financial institutions and companies. However, we have grasped the overall exposures and exposures by category, such as loans, bonds, derivatives, with regard to major banks and other types of financial institutions that I mentioned earlier.

As I said earlier, in light of the depth of the capital cushion of individual Japanese financial institutions, there is no evidence to suggest that there could be a serious impact on their management, at least based on the information we have so far obtained.

Q.

I have two questions. The first question concerns the planned merger between Merrill Lynch and BOA (Bank of America), and the second concerns the injection of capital into a major U.S. insurance company, AIG (American International Group). If these moves produce some kind of impact, how will you deal with it?

A.

Regarding Bank of America's acquisition of Merrill Lynch, I would like to refrain from making comments, as the deal is based on the management decisions of individual financial institutions. As for AIG, I am certainly aware of media reports about the injection of capital. However, I would like to refrain from making any particular comments at this time.

Q.

Was there any specific discussion at the informal meeting of cabinet ministers about how the impact of the financial crisis is likely to spread to the real economy?

A.

There was no such discussion at the meeting. At the subsequent meeting convened by the Prime Minister, which I mentioned earlier, there was a consensus on the following points: that Japan's situation is different from the situation of the United States, where the subprime mortgage problem has hurt financial institutions, leading eventually to a credit crunch and producing an impact on the real economy; and that Japan still needs to keep a close watch on future movements of stock prices, exchange rates and crude oil prices, as they could affect the economic condition.

Q.

At the cabinet meeting or the informal meeting of cabinet ministers, did you explain any specific measures that you are planning?

A.

I reported on the overall situation that I talked about earlier and explained the measures that the FSA has taken since yesterday. In addition, I stated that based on the information so far obtained, regarding Japanese financial institutions' exposures to Lehman Brothers, the FSA does not perceive a situation in which there could be a serious impact on the management of Japanese financial institutions in light of the depth of their capital cushion.

Q.

After you issued administrative orders against Lehman's Japanese subsidiary yesterday, the company applied for bankruptcy procedures under the Civil Rehabilitation Act this morning. Does this make it necessary for you to take new action?

A.

We have issued a business suspension order in anticipation of that move.

Q.

So, you will not take any new action?

A.

No.

Q.

At the meeting of financial affairs cabinet ministers, I understand that there was a consensus on the need to keep a close watch on the prices of stocks and crude oil, and to ensure cooperation between ministries and agencies when necessary to deal with future incidents. Was there anything else on which a consensus was formed at that meeting?

A.

Basically, those were the points on which a consensus was formed. Under the Prime Minister's watch, we agreed to prepare ourselves to respond quickly whatever may happen.

Q.

I will ask this question to make sure. You have said that there will not be a serious impact on individual financial institutions based on the information so far obtained. Does that assessment also apply to regional financial institutions - regional banks, second-tier regional banks, Shinkin Banks and credit cooperatives?

A.

I was talking about overall financial institutions.

Q.

I have another question about exposures to Lehman Brothers. According to court documents submitted by Lehman Brothers, the U.S. parent company, eight Japanese financial institutions have exposures totaling 1.67 billion dollars.

A.

Well, 1.6 billion dollars…

Q.

It is equivalent to around 175.3 billion yen. Of the amount, Aozora Bank accounts for 463 million dollars and Mizuho Corporate Bank 382 million dollars…

A.

Could you say it again?

Q.

Aozora's exposure is 463 million dollars and Mizuho Corporate Bank's 382 million dollars…

A.

Does that figure represent Mizuho Corporate Bank's exposure?

Q.

That is correct. These figures are based on documents submitted to a court.

A.

Could you mention the figure once more? What was the exposure of Mizuho Corporate Bank?

Q.

The exposure came to 382 million dollars for Mizuho Corporate Bank, 231 million dollars for Shinsei Bank, 185 million dollars for the former UFJ Bank and 177 million dollars for Sumitomo Mitsui Banking Corp, according to the documents. Do these figures match those identified by the FSA? Or are they different?

A.

We cannot comment on specific figures, as I already told you. However, we believe that we have properly grasped the exposure figures.

Q.

The exposures of the major banks that I mentioned total 1.6 billion dollars, or slightly under 180 billion yen. Does this match the figure identified by you?

A.

Could you say it again?

Q.

The exposures of the eight major banks total just under 180 billion yen. Does this match the figure identified by you?

A.

Although it is important how much credit they provided to Lehman Brothers, their situations will vary significantly depending on how much their claims are covered by collateral, how much they have built up loss reserves and how the bankruptcy procedures will play out. I am afraid that discussing this matter based only on the size of exposures would be misleading. I believe that the FSA has properly grasped how assets, including loans, have been secured, and how they have been involved in derivatives transactions, not to mention their exposures.

Q.

You say that there is little possibility that the capital of financial institutions, including major banks, could be eroded significantly. In any case, what do you think of the possibility of the management conditions of Japanese financial institutions, including major banks, deteriorating as a result of this bankruptcy?

A.

It happened only yesterday, so it is difficult to predict how much it will hurt their management. At least, I can say that we have not detected any incident, item or data suggesting that there could be a serious impact on their management.

Q.

Regarding the FSA's cooperation with the financial authorities of other countries, how have you exchanged information with them so far and how do you intend to engage in cooperation and information exchanges in the future?

A.

Of course, we now have a variety of means of communication, so we plan to exchange opinions with foreign authorities almost every day. Depending on the circumstances, we will also hold a variety of consultations as necessary.

(End)