Trying to get an estimated write-off % of an estimated amount of bad loans is pretty much guesswork at this point. It depends on the definition of "bad loan". Most estimates are more in the $500BB range, but who knows? Anyway, the % will fall as the amount rises, if you see what I mean. I would agree, though, that the Y30 trillion is too little -- if they don't want to support the bad loans, who can blame them, but not keeping the depositors' confidence at 100% could spell fast disaster. How do you say "bank run" in Japanese? These banks need to talk to their friends in Hong Kong. If the Japanese public ever loses faith in the safety of their money, these banks will shatter like wieners in liquid nitrogen.
The important, the crucial aspect of the Japanese plan is the audit teams who are going to turn on the lights and peer into the many dark corners of these institutions. The real problem in Japan is that Somebody's Boss's Brother-in-law has a piece of real estate with a half-finished office building on it, and the bank is carrying a 95% loan secured by the property at cost (including cost of improvements) (say $50MM) rather than the market value (say $20MM), the owner can't beg borrow or steal money to complete the project and there is no market for it even if he could. The market value of the unimproved real estate is way too high, and the improvements are wasted money.
In THIS situation, the Japanese plan will theoretically identify the loan and force the institution to revalue it, i.e. it will become an official "bad loan", and the bank won't be able to lend the investor any more interest payments. Whether the land is sold and the loan written off, or the package is renegotiated or recapitalized or resold or refinanced or foreclosed, is immaterial. The important thing in Japan right now is to expose the widespread accounting abuses and force banks to realize the loss.
What the bridge bank will do is this: where an institution has too many bad loans hidden in the executives' drawers (or golf bags), the market may be able to close it without the government needing to face the embarassment of ordering it closed. When assets fall below 8% of performing loans, for instance, international rules require retraction in the international market, at least. And depositors will, at some point, decide their money might be more appropriately held elsewhere.
The bridge bank will provide both solvent borrowers and depositers with quick access to cash, so that viable businesses have continued access to commercial credit and the depositers feel secure enough not to start a general bank run. Without doubt, the Japanese gov't will increase the amount of funds available to prevent general catastrophe. The Japanese gov't has LOTS of hard cash available, and you'd better believe that you'll see some real clout come to bear at the first sign of a run on a major bank.
Sorry to be so long-winded. The point is, that the Japanese scheme (if it is carried out) will actually cure the #1 problem, which is the Japanese banks' loan accounting. If these were U.S. banks, I would say "fraudulent accounting", since a U.S. banker would go to jail for these kinds of shenanigans. But hiding loan weaknesses has been, in the past, a more acceptable practice in Japan.
The Japanese don't like to air their dirty linen in public. I see a message implied here: they see the absolute necessity of accurate loan accounting and are going to implement it in their own way, getting the job done but with as little loss of face (and life) as possible.
I also am starting to think it will get worse in Japan before it gets better. Once the wall of silence starts crumbling, the dam will break and the world will get a look at how bad the situation really is.
The Japanese gov't isn't as "weak" as a lot of people say. It is just built on a consensus, and the consensus is largely out of public sight.
The portion of the "bridge bank" plan that is important, to me, is the development of independent audit teams. Whether the current consensus will give them enough power to stand up to the ex-government officials in charge of the banks -- that is, whether they will be able to turn in their opinions without the bank president calling their boss to veto their work -- remains to be seen. |
