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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: TimbaBear who wrote (930)	10/25/1998 6:30:00 PM
From: Henry Volquardsen	Read Replies (4) of 3536

Hi Timba, Your questions are good and no intrusion whatsoever, welcome to the thread. Actually the shareholders in Long Term Credit Bank and and any future banks nationalized under this plan get nothing, their equity has been wiped out. The bank has failed and the only reason that terminology is not being directly used is to save face. The next step is as you say. The Japanese government will absorb the bad debts and clean up the balance sheet of the banks. The functioning of this part of the process will be very similar, I assume, to the functioning of the Resolution Trust Corp. in the US. This will require significant capital contribution by the Japanese government. After they foreclose on the bad loans they takeover they will be in possession of considerable assets which they will eventually sell back to the private sector. The final stage will be to return the cleaned up bank to the private sector. First capital will be injected so that the new bank will meet capital requirements. From my reading, however, these cleaned banks will not be simply handed over to other banks. They will be merged into those banks. That will leave the Japanese government as a major shareholder in the new institution. I'm sure at some point their stake will be sold back to the private sector. There is an inflationary implication as the government will need to generate significant amounts of cash to take over bad loans and recapitalize the bad banks. But they will not be paying old shareholders, I believe, and they will have assets that they will be able to sell at some future point and recoup some of the expense. The reform of banking and accounting practices are to be handled by separate legislation. The question of wether banks will practice 'defensive underwriting' once recaitalized is probably the most important question. If they don't the recapitalization will have accomplished nothing. I suspect however that they will get strong inducement from the government, who will be the largest shareholder in some banks, to start lending again. Henry

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