SPECIAL REPORT-Inside Tepco's bailout: Japan Inc saves its own

marked the high-water mark of the ministry's reputation and came just as an American researcher Chalmers Johnson, was finishing an influential book that would credit the ministry with a central role in engineering Japan's "economic miracle" that began in the 1950s.

As a fast-track prospect, Koga had been dispatched to South Africa, sent to work on U.S. trade talks and dispatched to the OECD in Paris before ending up back in Tokyo, where in 2003, he helped create new agency set up to speed the restructuring of "zombie" Japanese companies like retailer Daiei and cosmetics maker Kanebo.

Koga had seen that tough-love restructuring worked first-hand and saw no reason it should not be applied to Tepco. In fact, he worried that leaving Tepco under a decade of government oversight would deprive it of the funds and dynamism it would need.

Instead, shareholders and creditors should be first in line to sacrifice and Japan's largest utility should be put through bankruptcy, he argued.

Then, he said, the utility's senior executives should be fired, salaries and pensions should be slashed and its Tokyo headquarters -- just a short walk from the ministry that had long protected it -- should be sold.

At that point, Tepco should relocate to Fukushima "since the first priority should be payments to the victims of the nuclear crisis," Koga said. A failure to push that kind of restructuring would mean that taxpayers would end up paying as much as $60 billion more in clean-up costs, he warned in an April 5 memo that began to circulate among politicians over the next week and prompted a warning from his superiors at the ministry.

By email and in person, they asked him to stop. One senior official told him that it was "hard to watch" him behave in this way. He was accused him of shameless self-promotion. Others outside the ministry offered support.

Looking back, Koga knew he was fighting a rear-guard action against long odds. Tokyo Electric and its allies already had their bailout plan in the works, he had learned.

"It appeared to me that Tokyo Electric and the banks were exerting strong influence and that the scheme was going in the wrong direction," he told Reuters. "I thought I should relay all this to the public and get people to correctly understand the issues. That would make it easier for the government to make the right decisions, even if there was a lot of undue pressure to do otherwise."

THE DARK ROOM

By early April, the Japanese government's "team Tepco" was already coming together in the darkened corner on the second-floor of a building attached to METI, according to participants.

Most lights in the building had been turned off to save electricity and set an example in conservation because of the loss of the Fukushima reactors. Only one elevator was left in service and the only light in hallway came from a vending machine heavy on caffeinated beverages like canned coffee and energy drinks.

As a 40-member team of officials met to consider how to pay for the economic damage for the Fukushima disaster, the Nuclear and Industrial Safety Agency was holding twice-a-day briefings for reporters just upstairs on steps being taken to bring the reactors under control.

Although the Tepco working group included representatives of Japan's finance and agricultural ministries, it was understood that the show would be run by the senior METI official, Shinsuke Kitagawa, a veteran of the ministry's influential energy bureau.

In the buttoned-down, elitist culture of METI, Kitagawa represented something of an outlier. A graduate of Keio University rather than Tokyo University, his career included a long-shot effort in 2007 to convince Gulf States including Abu Dhabi that they should prepare for "post-oil" future by investing heavily in Japanese solar and oil recovery technology.

For the emergency Tepco project, Kitagawa had a clear mandate. The starting point was that Tepco would be spared bankruptcy because it could jeopardize its ability to proceed with repairs to its reactors and make payouts to victims while demoralizing its workers.

At that point, Tepco's main bank, SMBC, stepped in with a proposal that crystallized the consensus and became the outline for the government's plan, people in the discussions said.

As a regional monopoly representing a third of Japan's electricity demand and its most populous area, Tepco had long enjoyed the ability to spend money on everything from steel, to fleets of vehicles to TV commercials without haggling on price. That made it one the most prized customers for a range of industries, analysts say, including banking.

The former Mitsui bank had ties to Tepco going back to at least the fast-growth period of 1950s defined by shared capital and a history of mutual reliance in hard times.

By 1998, the Mitsui bank had merged to become Sakura Bank and was facing a growing bad loan problem. As part of the rescue, Tepco and other Mitsui-affiliated companies agreed to buy shares to help shore up the bank's capital.

By late March, the bank, Japan's third-largest lender after a merger with Sumitomo, was determined to return the favor at a time of crisis for Tepco by leading a syndicate for a $25-billion loan that looked like the world's riskiest deal on paper.

With Tepco's stock plunging and its credit rating on the cusp of junk status, Masayuki Oku, chairman of Sumitomo Mitsui Financial Group, met with METI Vice Minister Kazuo Matsunaga, in late March, Oku.

"It's true we exchanged opinions," said Oku, who is also chairman of the Japanese bankers association.

The meeting itself was seen as a way for the ministry to signal that it would not push for a hard-landing for Tepco, clearing the way for SMBC and other banks to offer new loans without the threat of imminent bankruptcy.

"I didn't want to believe that this was happening," said METI's Koga, who said he was spurred to write his dissent in part because of the rumor that his agency's most senior official had offered a tacit guarantee to new bank loans. "Why would the banks ignore risk like this?"

In the end, the $25-billion loan deal for Tepco, which included Mitsubishi UFJ, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc, was announced on April 11.

THE ROAD NOT TAKEN

Around the same time, Nobuaki Kurumatani, a veteran Mitsui banker who had shot up the ranks at SMBC, sat down with the Kitagawa-led team studying Tepco with a short proposal that became the core of the plan approved by Kan's government a month later, documents show.

The SMBC plan proposed creating a nuclear compensation agency that other regional utilities would pay into much like banks paying deposit insurance. Banks, including SMBC, would make loans to the agency with a government guarantee, a source of new business for the lenders.

At the same time, the Kurumatani proposal capped the amount of compensation that Tepco would be forced to pay to roughly $8 billion over 10 years, a fraction of the projected total cost.

Everything in the plan won the endorsement of team Tepco -- except the way it capped Tepco's payouts, according to documents and statements by officials. That proved contentious.

A number of Wall Street banks pitched for an alternative to the bailout, including proposals that would have split off a shell company to handle Tepco's unresolved liabilities, much as the U.S. government did with GM, the sources said.

But Kurumatani put the word out that proposals from the non-Japanese banks were not welcome. There would be no investment banking fees. The message from SMBC: If you are bringing a proposal to restructure Tepco, you might as well turn around and go home.

Kurumatani and a pair of other colleagues quietly visited lawmakers from the ruling Democratic Party to lobby for the plan, according to a legislative aide. It was clear that the plan could not win support in the face