From soybeans to subprime

From the Japanese occupation to the KMT-Communist lovefest, Taiwanese capitalism at its best

Published July 10, 2008 6:41PM (EDT)

A glance at its Web site reveals the Taiwanese conglomerate, Cathay Financial Holdings, to be every bit the modern, state-of-the-art, globally-operating high-finance wheeler dealer. Among its eight subsidiaries are Taiwan's largest life insurance company, a securities firm, a bank, and a couple of venture capital funds. If you need any more proof of Cathay Financial's bonafides, just check the headlines. On Thursday, the company announced that profits were down 65 percent in the second quarter of 2008, in part because of "large write-downs for assets affected by the U.S. subprime crisis." (All told, Taiwan's financial firms have lost $1.4 billion since last August due to bad subprime investments.)

Taiwan doesn't just make computers, display screens, and top-of-the-line semiconductors, it also makes bad subprime bets, too. Welcome to the global economy, la Isla Formosa, you're all grown up now.

Providing some relief from the bad subprime headwinds, however, are brightening prospects for business expansion on the mainland, following the election of the new Nationalist (KMT) party president, Ma Ying-jeou. Cathay Financial Holdings wants to sell a lot of life insurance in China. (The KMT, which lost the Chinese Civil War before fleeing to Taiwan, used to regard the Communists as their sworn enemies. Now they're best buddies. Go figure.)

Playing games with internationally traded securities on the one hand, expanding in China on the other, Cathay Financial Holdings, again, would seem the very epitome of how global capitalism works today. But dig a little deeper, and history offers us a few snippets demonstrating how the Taiwanese variety of capitalism is still a bit different from that practiced in New York or London.

The Chairman of Cathay Financial Holdings -- the largest financial conglomerate in Taiwan -- is Tsai Hong-tu, recently dubbed the richest man in Taiwan. His father, Tsai Wanlin, likewise, was named the richest man in Taiwan in 1996. His uncle, Tsai Wan-tsai, happens to run the third largest financial conglomerate in Taiwan, Fubon Financial Holdings, and is the fourth richest man in Taiwan.

But the two branches of the families reportedly aren't on the best of terms, dating back to one of Taiwan's biggest financial scandals of the 1980s, the transformation of the "Tenth Credit Cooperative" into a kind of personal bank for Tsai Hong-tu's cousin, Tsai Chenchou.

Sound complicated? We're only just getting started.

The story starts during the Japanese occupation of Taiwan, when the family patriarch, Tsai Wanchun, the son of a poor rice farmer in southern Taiwan, made his way up to the big city of Taipei and found employment at age 16 as a cosmetics salesman for a Japanese company. Tsai Wanchun and his younger brother, Tsai Wanlin, also legendarily sold fruit and soybeans at a roadside stand, but eventually started moving up the entrepreneurial ladder, establishing a soy sauce factory, a department store, and eventually, along with third brother Tsai Wantsai, taking over the Tenth Credit Cooperative in 1962.

Tsai Wanchun built the family company into one of the most powerful financial companies in Taiwan, but after suffering a debilitating stroke in 1977, the family holdings were divvied up between Wanchun's brothers and sons. According to one account, the new lines of organization tracked a split that developed between the children of Wanchun's first and second wives. But the bad blood between brothers Wanlin and Wantsai apparently didn't really kick in until their nephew, Chenchou, made a complete hash out of the Tenth Credit Cooperative, and was ultimately arrested on charges of embezzlement.

Now, I was all prepared to wax lyrical about how, to this day, Chinese corporations in Taiwan and Hong Kong and China are still dominated by family allegiances (and riven by family squabbling) that remind one of nothing so much as Ming Dynasty imperial princes scheming for influence and power in the fifteenth century. I also find it striking how short the time span seems between Wanchun selling soy sauce on the street during the Japanese occupation and his nephew Hong-tu betting on mortgage securities linked to subprime loans in the U.S. today. We would do well to remember how shallow modern capitalism's roots are in either China or Taiwan.

But then I dug out my dog-eared copy of "State and Society in the Taiwan Miracle" by my former advisor at U.C. Berkeley, Thomas Gold, and found a footnote referencing the Tsai misadventures in the mid-80s.

The diversified Cathay group, founded by Taiwanese Ts'ai Wan-ch'un, has long been regarded in the public mind as engaging in shady practices, such as lending money to struggling firms and then converting debt to equity and swallowing them up, and profiting excessively in the property boom of the late 1970s. It appears that funds from the group-owned Tenth Credit Cooperative had been illegally diverted to other group enterprises using employees' names as borrowers... A run began on Tenth Credit in the winter of 1985 and spread to the related Cathay Investment and Trust. A control Yuan investigation caused some high level party and government resignations and numerous arrests, including that of Tenth Credit Chairman Ts'ai Chen-chou a KMT member of the Legislative Yuan.

There's nothing in that paragraph we don't see every day in the United States. Maybe that's why I like China so much. It reminds me of home. w

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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