I think there is some potential of Japan being able to create an "RTC" type entity to work out the underwater stock
positions that the Japanese banks hold..... it's got to be worth a try, as their other approaches have been
abysmal failures.
John
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Japan May Let Banks Create Entity
To Buy Their Huge Stockholdings
By PHRED DVORAK
Staff Reporter of THE WALL STREET JOURNAL
March 22, 2001
TOKYO -- Of Japan's many proposals to support its wobbly economy, one of the most daring is an idea to stabilize the financial system and stock market by letting banks unload their huge holdings of shares onto a special purchasing entity. If it goes ahead, it might achieve a groundbreaking rearrangement of corporate ownership. More likely, say critics, it would retard much-needed change.
The proposal, which is still in the planning stage, would let banks sell some of the estimated 45 trillion yen ($368 billion) of stocks they have on their books to an entity they would set up and finance themselves. The fund would hold the shares for as long as five years, and then sell them to the public. The ruling Liberal Democratic Party politicians who proposed the plan are suggesting that the government guarantee the loans banks make to the fund, effectively covering any further losses on the stocks.
In theory, the plan would help stabilize the financial system. Banks have huge portfolios of shareholdings, a legacy from the days when Japanese business relationships were sealed with stock. But they are facing huge unrealized losses on those shares because of Japan's decade-long bear market. And in the fiscal year that begins in April, things stand to get worse: New accounting rules on securities will force the lenders to mark their stock holdings at current market value, and thus force them to actually book those losses. Those mark-downs would directly erode banks' capital bases, making their financial health subject to the whims of the stock market.
A Crucial Bonus
"It's not good for the financial system to be linked with stocks," said Yoshinobu Yamada, a bank equities analyst at Merrill Lynch in Japan. "In the entire world, Japan is the only country where the financial system becomes unstable when stocks drop."
See a breakdown of Japanese companies' opinions on selling cross-holdings.
Any plan that calls for the sale of a significant portion of Japanese banks' long-held shares could also have another crucial bonus. Because the shares are the linchpin in the system of interlocking corporate ownership that has long defined the way Japanese companies are run, selling them -- even to a fund that holds them for a number of years -- could help dissolve the remnants of "Japan Inc." forever.
"It's structural reform," said Ichizo Ohara, a senior LDP legislator, referring to a plan of his own to force banks to sell shares to a trust fund.
Yet chances are things won't work that way. Mr. Ohara himself pans the main LDP proposal because it calls for making the sales voluntary. If so, he says, banks won't be able to overcome resistance to selling by the issuers -- who are also the banks' corporate customers. Banks themselves admit they are worried that their customers may not want to see large stakes in themselves suddenly transferred to another owner.
Debate About Secondary Losses
"We can't ignore the companies themselves -- whether they like the idea or don't like it," says Masato Nakamura, head of corporate planning at Sanwa Bank Ltd. Mr. Nakamura, whose bank already has a plan to sell at least half its shareholdings over five years, also said Sanwa wouldn't support any plan where banks were expected to cover secondary losses on the stocks by the entity that purchases them from lenders.
LDP politicians have proposed having the government insure against such losses, as a way of winning bankers' support. Yet some critics argue that if the government covered such losses, it would amount to propping up the stock market with taxpayer money. Indeed, the politicians who masterminded the idea, such as LDP heavyweight Shizuka Kamei, are known for advocating the use of taxpayer money to support stocks.
Other detractors say that any action to prop up the market would have another downside: It would remove the pressure, in the form of falling share prices, that Japan's lenders and politicians are now feeling to clean up the nation's single-biggest economic problem -- the huge burden of bad loans and deadbeat borrowers plaguing the banking system.
"It allows the government to reduce the threat of the kitchen knife against the throat," said David Atkinson, bank-equities analyst at Goldman Sachs in Tokyo."If you take it away [reform] becomes theory. And Japan isn't very good at theory."
Some Precedents
To be sure, there is some precedent for government intervention in markets during crises. Hong Kong managed to pull off a $3.4 billion government purchase of stocks in order to fend off a systemic meltdown in 1998, during the height of the Asian financial crisis. Many analysts say the plan worked as envisioned, and Hong Kong has been selling down those shares.
However, Japan doesn't have a stellar track record with asset-buying funds. In 1992, Japanese banks set up an organization to buy their bad loans, with the proviso that the banks would cover any additional losses incurred when the loans were collected, and buy the debt back if collection proved to be impossible. That system flopped, because few loans were sold and collection was extremely slow.
And in 1964 and 1965, banks, brokers and insurance companies set up two funds to buy stocks, in an attempt to support share prices during a market crash that threatened to bring down several securities houses. Those two funds bought 2.5% of the stock market (by capitalization) the first time and 3% of the market the second time, and eventually managed to sell off their holdings without taking losses. Yet economists argue that the market recovered simply because Japan's economy turned up, not because of the fund's stock purchases. |
