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To: gdichaz who wrote (15122)	9/17/1998 2:24:00 PM
From: dougjn	Respond to of 152472

What the hurting countries of Asia need to go through, IMHO, is something akin to our bankruptcy processes. Which involve a number of things. Fresh lending to give them some time, and prevent complete collapse of business activity. Akin to our "Debtor in Possession" financing. This financing gets special priority trumping everything else in payback security. Otherwise it would never come in. This is where the IMF comes in. Which generally also attracts parallel private lending, with the same sorts of rights. But that is not the end of the story. Not by a longshot. Equity holders in the sick enterprises need to take a deep haircut, and sometimes be wiped out. Prior lenders need to take a haircut as well, though after equity holders, for the most part. As well the sickest parts of the enterprises need to be reduced, or shut down. Jobs need to be cut in those sick areas. All of this is necessary so that there is room for the healthier areas to break even, and then make money. And as well for capital and jobs to be freed up to subsequently go to healthier areas that can grow. On on overall, and certainly on an individual level this "freeing up" and "subsequent" business is fraught with pain, uncertainty and deep worry. It is horrible. That is especially true when there are few or no safety nets. People rely on extended families, etc. Not nice. But the only alternative, for countries rich enough, is to stagnate for years. As excess capacity persists. Money loosing areas choke off money making ones. There is no room for growth and no appetite to lend except to roll over existing illiquid loans to stave off collapse. Welcome to Japan. I don't think the rest of Asia even has this alternative. Unless, I guess, the IMF keeps funding, without demanding any of the restructuring pain which the Asians so much blame it for. That's my take. Doug

To: gdichaz who wrote (15122)	9/17/1998 2:46:00 PM
From: dougjn	Respond to of 152472

As an addendum to my Asian's need to go through U.S. style bankruptcy, let me add this. Bankruptcy is often thought to involve the complete collapse of a business. In the U.S. (unlike say Europe) it usually doesn't, at least for sizeable businesses. A few of the worst cases do require complete liquidation, with attendant total loss of jobs and economic activity of that enterprise. But the whole effort in U.S. bankruptcy is generally to avoid that. The basic idea is you have to do two things. Reduce the debt level. Fairly. Not more than necessary for the company to make a go of it post bankruptcy, but enough. And cut out areas that cannot even make a good operating profit before debt service. One problem with IMF lending in the past is that its mostly just been tide over financing. Without requiring all that much cutting out of non-economic activity. In reality. Nobody likes pain one little bit, and foreign organizations will always be the first to be blamed. Especially by the less successful. But perhaps a worse problem is the IMF generally doesn't demand enough debt reduction for the countries it is helping. Sure the IMF loans and the new money that comes in post crisis needs protection and payback or it won't come in. But the private money that preceded it needs to take a haircut. Exactly why this is true I'm not sure. Partly I think it has to do with the fact that the very institutions that would have to take the haircut -- including leading international banks, are the ones the IMF is trying to attract in to provide new crisis financing. Or roll over financing. But this doesn't really cut it for me. This needs to be reformed I think. If you listened carefully, Rubin made some reference to this. The trouble is that if investors now take a huge haircut there is fear that they will be very slow to lend again after the current crisis passes. And hence recovery will be much delayed. But again, I basically just don't buy it. U.S. banks took big haircuts in the 80's due to the Latin debt crisis. The attendant relief from debt loads was very important for Latin recovery in the 90s. But the impact on U.S. banks was in fact so bad that the U.S. gov't had to step in with various forms of taxpayer money to keep the big money center banks from going under, with cataclysmic effects on the U.S. economy. The trouble now is that by far the most overextended international lenders are the Japanese banks. Which are in considerably worse shape than our money center banks in the late 80's early 90's. Even before they have really bitten the bullet. The Japanese mom and pop, collectively, are some of the richest misers in the world. But they are none to eager to bail out their horrific banks. Not surprisingly. Meanwhile, with Japanese birth rates way below sustaining a level population, their economy is contracting. Now strongly. It is not a good situation. Doug