The significance of Goldman and Sumitomo's role reversal

Sumitomo''s relationship with Goldman is not a new one, although in our view it does reflect a telling reversal of the relative power of Japanese and US financial institutions.

One of the most ironic things about Goldman's acquisition of a $1.2 billion stake in Sumitomo Mitsui Bank Corp is the fact that it used to be the case that Sumitomo Bank was the shareholder in Goldman.

Back in 1986 - when Goldman was not the global powerhouse it is today - Sumitomo Bank became a limited partner of the firm. It invested $500 million and purchased 12.5% of Goldman's stock.

Sumitomo finally sold its stake when Goldman went public in 1999. Credit must go to Sumitomo for a decent investment - possibly the only decent one the Japanese made in the US in the 1980s.

The 1980s, it will be remembered as the era when almost everyone thought Japan was going to take over the world. Euromoney ran quite a famous cover story that had the tagline 'The Japanese are coming" - a reference to how Japanese banks like Sumitomo were about to take over the global financial system.

As it happened, the opposite turned out to be true. The role reversal now sees Goldman as the shareholder in Sumitomo Mitsui; and the terms of the deal are very favourable to the US firm, given it can now use the Japanese bank's balance sheet to better compete with universal banks like Citigroup. Indeed, the special deal will allow Goldman to use a large chunk of Sumitomo's balance sheet to offer bridge finance to investment grade clients across the globe. It has not been disclosed just how much it can use, but estimates run to around $40 billion.

Goldman will also be able to use Sumitomo's branch network to distribute its asset management products, and will also see a closer relationship with Sumitomo as a way to cooperate more on building investment banking relationships with Sumitomo's clients and possibly to buy NPLs - as Lehman is doing with Woori in Korea.

Helping this whole process of cooperation is the fact that Goldman's recently appointed chairman in Japan, Akio Asuke was at Sumitomo Bank for 37 years and is the former deputy president.

And as an investment? Before converting to equity, Goldman will enjoy a 4.5% annual return from the securities it has bought. More importantly, Goldman is clearly taking a view that Japan has hit bottom and while many have said (or thought) this before, in Goldman's favour is the fact that its market timing is particularly good when its own money is involved.

After all, this is the bank that picked the very top of the US bull run to IPO itself - with huge benefits for the partners - and which invested in Korea's Kookmin for a very good return.

All in all, it looks like a savvy move for Goldman. The biggest risk is that the Japanese government nationalizes the entire system and wipes out Goldman's equity.

For the Japanese, it is yet another humbling reminder of how far its once-proud banks have fallen since the heady 1980s. Goldman's ownership in Sumitomo and the confidence this has brought, is a true reversal of fortune.

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