June 29, 1998
International Trader
Long-Term Credit Bank May Be a Misnomer, But Merging It Doesn't Solve Japan's Woes
By PETER C. DU BOIS
Can we talk? Financially ailing Long Term Credit Bank of Japan, desperately in need of assistance, reportedly put this question to several Japanese banking institutions before it found one that would listen.
According to unnamed sources cited by a Kyodo news service, LTCB informally approached Dai-Ichi Kangyo Bank, its largest shareholder, only to be rejected. Subsequently, it turned to Sumitomo Trust & Banking "as its last hope." Last Friday, Sumitomo Trust agreed to discuss a merger.
Is this good news? Does it signal that Japanese banks finally are facing the reality of their bad real-estate loans? Yes, say two business groups. Absolutely not, a banking analyst insists.
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Dow Jones Global Indexes1 | Emerging Markets2 | Global Stock Markets3
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Let the record show that LTCB's stock price, which fell to the insultingly low level of 58 yen a share last Thursday on worries about the bank's viability, rallied to 73 Friday. In Tokyo, any price below 100 yen is deemed a sign of severe woes. On news of impending talks with LTCB, Sumitomo fell 20 to 648. Subsequently, Atsushi Takahashi, Sumitomo's president, said Japanese authorities were willing to support the merger, possibly with public funds.
Partly for technical, money-market reasons, the yen fell to 142.95 to the dollar Friday before steadying, but the 225-share Nikkei index of Tokyo shares (15,210.04) was only fractionally lower on the week.
Takashi Imai, chairman of Keidanren, a federation of business organizations, said the merger talks have applied the brakes to the "turbulence" of Japan's financial system. Kosaku Inaba, head of the Japan Chamber of Commerce and Industry, said this move marks the first step toward the stabilization of the nation's financial system.
Jim McGinnis, Tokyo-based Japanese banking analyst for Dresdner Kleinwort Benson, strongly disagrees. He swiftly lowered his rating on Sumitomo Trust to sell from buy. To say that he's disappointed is a vast understatement. He finds it "frightening" that ST's management deems the very thought of a merger with LTCB as "economically sensible."
In his view, Japan's financial markets are in desperate need of credibility, and this potential deal "will only further undermine" it. Why? This isn't a proactive move to address nonperforming loans in the financial system. Rather, it's a reactive knee-jerk move aimed at addressing the loss of confidence in LTCB's franchise by the market and the general public.
Warming to the topic, McGinnis notes that bad loans are a system-wide problem, and must be dealt with accordingly. Instead, this proposed merger "is once again an example of addressing bad loans on a bank-by-bank basis."
Over the past two weeks, Japanese officials several times have stated that the old "convoy" system is history. Under this full-employment plan, relatively strong companies were forced to help glaringly weak ones, with no loss of jobs and the combined business continuing to operate as usual. To McGinnis, a merger of LTCB and Sumitomo Trust appears to be a "shotgun wedding" that is reminiscent of the old convoy system, albeit accompanied by public money.
Initially, starting today, the cumulative wisdom of the stock market will decide whether this is the beginning of a new era in Japan or the same-old, same-old. Then again, upon examining LTCB's books closely, Sumitomo Trust could call off the wedding.
Recently, Peter Tasker, Dresdner Kleinwort's Japan strategist (and a novelist), outlined four possible scenarios for restructuring the nation's financial system. He gave a 40% probability to Doing the Wrong Thing, which could be the case here.
Briefly, public money is pumped into larger banks on a scale sufficient to keep credit agencies at bay. They continue to lend generously without regard to profitability. "Some hopeless institutions are indeed closed, but all their assets are transferred to a government-funded 'bridge bank,' which continues lending on traditional, noncapitalist terms to politically important industries." Bad loans are written off at taxpayers' expense, with no attempt to retrieve collateral. Borrowers and lenders are both made whole. Worries subside, and the system continues unchanged until the next crisis. The bond market "crumbles," and equities go nowhere.
Tasker's other scenarios are: Doing the Right Thing (30%; the stock market becomes dominated by real investors, returns on financial assets rise and capital flows in), Creeping Necrosis (20%; capital exits, Japan slowly dies) and Wag the Dog (10%; Japanese economic policy is run from Washington, peace and goodwill reign).
Overseas stock markets were mixed last week, with Europe (13 up, six off) far outperforming the Asia-Pacific region (12 off, four up). |
