Zeev thanks for your thoughts. Very interesting. I don't think your ideas touch on massive deflation however. Please address this in your sceanario. OK.
dismal.com
dismal.com
What the hell we might as well "go" for it here guys.
For Private Use Only
(C) NY TIMES
By SHERYL WuDUNN and NICHOLAS D. KRISTOF
TKYO -- When finance ministers and investment strategists have nightmares these days, they often involve huge financial institutions whose names are hardly household words in the West.
Yet if names like Dai-Ichi Kangyo Bank or Ashikaga Bank trip on Western tongues, there is a growing apprehension that Japanese financial institutions like them may threaten the long boom on Wall Street and even the stability of the global economy.
Japan's economy is in recession, its stock market has lost 60 percent of its value since the peak eight years ago, and its currency has cascaded 43 percent from its high point in 1995. There is increasing agreement in world financial capitals that the problems center on something the Japanese government is only beginning to confront: the mountain of bad debts at the nation's banks.
Now there is an emerging sense that the next few weeks may mark a turning point for the banking crisis -- and, indirectly, for the global economy to which it is connected.
"The situation in Japan is a source of very considerable concern," Lawrence Summers, the U.S. deputy treasury secretary, said in Washington after his return this week from a trip to Japan during which he sought to make Prime Minister Ryutaro Hashimoto face up to the debt crisis. Summers added that this was a "pivotal moment for Asia and the global economy."
U.S. policy-makers fear that Japan is a weak link in the international economy. Burdened by bad debts arising from a property market that has tumbled as much as 90 percent, some of Japan's largest banks are in a tenuous position. Merger talks involving Long-Term Credit Bank, one of the most troubled institutions, and Sumitomo Trust & Banking Co. Ltd., a somewhat stronger bank, were confirmed Friday.
Hashimoto says that the solution to the problem is what he describes as the "Total Plan." That is somewhat of a misnomer, for at this stage the plan is neither total nor fully formed. It is instead a vague idea of peeling bad loans off bank books and reselling them in the marketplace, much as the United States tackled the savings and loan crisis of the late 1980s by empowering Resolution Trust Corp. to sell off bad assets from the thrifts.
The centerpiece of the Total Plan would be the creation of a "bridge bank" that would take over the loan portfolios of failing banks, selling off good loans and laying to rest bad ones. The bridge bank would also look after customers of failing institutions, offering them a bridge so they could get by temporarily until they were able to establish a relationship with another bank.
Hashimoto said that he would summon Parliament for a special session late next month to pass legislation on the plan. The question being asked increasingly by bankers, diplomats and businessmen is no longer whether Hashimoto will act. It is whether he will do enough, and whether the proposed cure will rescue the Japanese economy or cripple it with more government intervention.
"The politicians are certainly starting to talk volubly about something having to be done even before the elections," said Minoru Makihara, the chairman of Mitsubishi Corp., referring to parliamentary elections on July 12. "That is something that they didn't talk about earlier.
"Now whether that will materialize or not, I don't know," Makihara added. "But at least the situation seems to have moved in the direction of action." William Seidman, former head of Resolution Trust Corp., is advising Japanese politicians on the banking crisis. "I told them that there's no way they can do this harmoniously," he said. "It will involve some pain."
Japanese banks are only dimly understood in the West, yet they are colossal -- the biggest bank in the world is Bank of Tokyo-Mitsubishi, with more than $550 billion in total assets, compared with less than $400 billion for Chase Manhattan Corp., the biggest in the United States.
In a few cases, the Japanese banks are tottering. It was the frailty of these vast institutions that led President Clinton and Hashimoto to order joint intervention in the currency markets last week to bolster the yen.
There is concern not simply about the collapse of any individual bank or the difficulties of its depositors, but rather about the consequences for the entire economic structure. In an increasingly globalized economy, there is a possibility that bank runs could trigger a liquidity crisis that could race around the world in minutes, sending markets plunging and ultimately provoking an international economic slowdown.
Nervousness about Japanese banks is in large part responsible for the decline of the yen. The joint intervention on June 17 bolstered the yen initially, but now it is slipping again, having weakened 0.14 yen Friday in New York, to 142.44 to the dollar. If the yen falls further, it could escalate the Asian financial crisis to a new level, particularly if China moves to devalue its currency.
Japan's big banks tend to all suffer from similar problems. All have far more bad debt than would be acceptable in the United States, but some are stronger than others. Bad loans as a percentage of equity range from 90 percent at Sanwa to 371 percent at Nippon Credit Bank -- compared with an average of 58 percent at the 22 largest U.S. banks during the height of the American savings and loan crisis in the late 1980s.
Among the stronger banks, Sumitomo is a part owner of Goldman, Sachs, while Bank of Tokyo-Mitsubishi, which is listed on the New York Stock Exchange, is viewed as fundamentally sound.
Anxieties have been raised in the last couple of weeks over the status of Long-Term Credit Bank, a venerable institution set up after World War II to provide long-term loans to help finance the nation's economic rebuilding.
Traditionally, the government dealt with ailing banks by merging them with stronger ones. The current banking landscape is a kaleidoscope of banks piled upon banks.
Long-Term Credit's quest has almost been a round robin, reportedly including talks with several institutions, including Nippon Credit Bank, itself essentially bailed out more than a year ago when the government injected new capital; and with Dai-Ichi Kangyo, itself the result of a rescue merger between Dai-Ichi Bank and Nippon Kangyo Bank.
Other market-moving reports said that Long-Term Credit was turning to the ailing Daiwa Bank. American regulators ordered Daiwa's U.S. operations shut down in 1995, after a bond trader incurred more than $1 billion in losses and then tried, along with the bank, to cover up the losses.
Long-Term Credit may have found a match. On Friday, it confirmed that it was discussing a possible merger with Sumitomo Trust & Banking, a smaller bank specializing in money management for institutional investors that has been forging ties with foreign firms like Citibank.
Not everyone gets rescued, as Yamaichi Securities, a brokerage, discovered when it went under last November. Then, Fuji Bank -- a giant, somewhat wobbly bank that is also the government's paying agent -- was Yamaichi's main banker, and its decision not to save Yamaichi was considered rational by the market.
But a few months later, tradition got the better of Fuji when it stepped forward to support Yasuda Trust & Banking, an ailing trust bank in Fuji's group of companies.
How did Japan's banks come to be so weak?
During the "bubble economy" of the late 1980s, Japanese land prices soared to ridiculous levels, and it was said that the Imperial Palace grounds in central Tokyo were worth as much as all of California. Japanese banks went on a lending spree, expanding their loan portfolios by $3.6 trillion -- a figure equivalent to 72 percent of the entire Japanese economy -- and in many cases taking buildings as collateral.
The real-estate market collapsed under its own weight, and the value of Japanese land plunged, with prime properties in downtown Tokyo falling to perhaps 10 percent of their peak values. The result is that perhaps $600 billion in loans may be unrecoverable.
Banks have been reluctant to sell property at these prices, so there is almost no active real-estate market today. No one quite knows the market price or the true level of bad loans.
"The market is very inactive," said Teizo Taya, a managing director at Daiwa Institute of Research. "There are no buyers."
The government did little about the loans for eight years, thinking that if property prices rose again, the problem would right itself. And indeed, if the collateral was again worth more than the property, the bad loans would become good. But the direction of the market is uncertain.
"I don't see a quick turnaround," said Osamu Aoi, director at Eiwa Real Estate Co. "I'm covering the downside. I'm very pessimistic. You have to have maximum pessimism toward Japanese real estate in order to survive."
Another problem haunting the banking system -- and making it difficult to resolve the crisis -- is that lending in Japan has been a murky process. Loan documents are short and scanty, if they exist at all, and bankers often performed little analysis on the creditworthiness of the borrower or on the viability of the project.
Often they lent simply on relationships, or because they owned shares in the companies asking for loans. That in turn makes collecting on bad loans a bit awkward.
"The banks have been avoiding drastic change," said Heizo Takenaka, professor of economics at Keio University. "Even the president of a bank doesn't understand his own loan portfolio."
So far, the banks have been reluctant to write off bad loans, partly because they do not have enough in profits or in capital to absorb those losses. "They have a lot of loans on their books at the original value and they may have to write them off at 20 to 30 cents on the dollar," said Robert Hormats, vice chairman of Goldman, Sachs International. "They don't want to acknowledge the fact that 70 to 80 percent of the value of those loans has disappeared."
In addition, the banks are reluctant to foreclose on loans, seizing property, evicting clients and being publicly branded as heartless capitalists.
Some bankers also are afraid of foreclosing on properties occupied by anyone affiliated with the Yakuza, the Japanese mafia, who have set up shop in many buildings that are the collateral for loans.
In 1994, an executive director in the Nagoya branch of Sumitomo Bank, one of Japan's most innovative and largest banks, was fatally shot. News reports suggested that his murder may have been related to efforts to collect on bad loans related to the Yakuza.
The bad-loan crisis has done more than create risks for the future. It has also had direct effects on Japan's economy, exacerbating the recent recession.
The most alarming problem for many ordinary Japanese businesses has been a credit squeeze throughout the country. Banks are calling loans from small and medium-sized businesses, or even from the affiliates of their big clients, and this is crimping investment and making the economic outlook less favorable.
Paradoxically, the credit squeeze has been intensified by the government's efforts to liberalize the banking sector. The government has been trying to restructure the financial industry, imposing stricter rules and embarking on a broad program of liberalization, called the Big Bang. In the process of preparing for these changes, Japanese banks have been trying to trim their assets to meet capital-adequacy requirements.
Ken Ohta, a general manager in charge of treasury at NEC Corp. said that liquidity "is the most important problem a Japanese corporate treasurer faces."
But Ohta said that NEC assured its access to financing by turning to Citibank, which arranged a syndicated loan. Ohta said, "Liquidity is a problem we haven't experienced for a long time."
Date Posted
The Flood of Asian Imports Has Begun 4/28/98
Asia's Problems Are Agriculture's Problems 2/17/98
When Is Asia Not Like Canada? 2/8/98
A Mexican Roadmap for Asia 1/23/98
The Regional Economic Impact of the Asian Currency Crisis 12/15/97
A Primer on the Southeast Asian Financial Crisis 11/24/97
How Important Is Asia? 11/10/97
How will the currency crisis affect the economies of southeast Asia? 9/12/97
|
