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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (8299)	11/17/1997 5:38:00 PM
From: Rational	Read Replies (1) \| Respond to of 18056

Tommaso: Printing yen will devalue every financial asset, except the US Treas. But, this will also decrease the capital/asset ratio of a bank: Cap Ratio = (Pref+Common Equity)/(Assets including US Treas) Thus, printing yen will excerbate the problem further since the denominator in the above formula will go up. External capital must be infused as equity/preferred stock: New ratio = (Old common&pref + New pref from Pension Funds' US Treas*yen/$)/Assets You can see infusing pref stock from Pension Funds' holdings of US Treas will magically improve the capital ratio since the numerator will go up. IMO, the Japanese market has not assimilated yet as to how public money will be infused to rescue banks. True, BOJ announced that it will guarantee deposits of a failed bank (this was expected). But, this announcement is not the remedy for the main problem of improving the capital/assets ratio. The market knows that and believes that the govt will have to remedy the bigger problem: the banks are capital-strapped. The government's only option (IMO) is to infuse capital only indirectly, i.e., through pension plans buying bank pref stocks. The pension plans are all invested in stocks, Japanese bonds, and US Treas Bonds. They cannot sell stocks to generate money because that would be devastating to the stock market, compounding banks' problems. Selling Japanese bonds to generate the cash for buying preferred stock will help to a limited extent, but this will be like printing money, raising inflation, and raising the cost to the govt. They may have exhausted this avenue. Pension plans selling US Treas to buy yen and use the yen to buy bank pref stock seems to be the only effective instrument left to solve the bank capital inadequacy crisis. Today's Jap market response was due to a belief that the Jap banks must be helped for Jap, Inc. to survive and that the Jap Govt will somehow do it. I predicted the Jap market to go up. I also had cautioned that unless the Jap Govt begins to sell US Treas, we cannot see an increase in US Treas yields and hence not see a bear market. The fundamentals are there for the market to go down. It will happen through an increase in bonds yields, IMHO. Sankar