An excellent article....
COMMENTARY: BAD BANKS: WHY JAPAN'S POLS ARE PARALYZED (int'l edition)
By Brian Bremner and Emily Thornton
Sept. 24, 1998
FOR PERSONAL USE ONLY
How's this for a nightmare scenario? As the fragile truce between Japan's ruling Liberal Democratic Party and the opposition unravels, all hope of a credible bank rescue disappears. The government of Prime Minster Keizo Obuchi falls. The Nikkei stock index falls several thousand points within weeks. One major Japanese bank after another publicly declares its insolvency. Credit evaporates, and the economy lurches from recession to depression. In a final humiliation, Japanese authorities under intense pressure from the U.S. invite a team of experts from the Bank for International Settlements to come in and sort out the mess.
This is not as outlandish as it might seem. Alicia Ogawa, managing director of Salomon Smith Barney, thinks the Japanese financial crisis is now ''so extremely dangerous'' that it will take intervention from some international organization to force a resolution. That's because the entrenched interests working against a healthy shakeout of the banking sector are enormous. Japan still has the financial resources to restructure the banks. But most of its politicians are using all their energy and expertise to hide the dimensions of the problem, not solve it. ''This is really a crisis of political leadership,'' says Yasuhisa Shiozaki, an LDP member of the Diet and key financial adviser on banking reform.
PET PROJECTS. At the heart of Japan's political problem is a deep fear of revealing just how widespread the rot is. If the LDP elders delivered a true accounting of the banking disaster, they might cast the party into the political wilderness for years. After all, the bubble economy came and went on the LDP's watch. And the collusion between the LDP and the banks--which donated $4 million to the party last year--is probably monumental. If true reform took place, the banks would have to open their books to public scrutiny. Voters would then learn how the banks channeled hundreds of millions of soft loans to LDP pet projects, and how some of those loans went to sweetheart investment deals for the politicians. Rumors that top LDP cadres benefited from such schemes have long circulated.
The LDP is not the only political force that has an interest in concealing the truth. The Ministry of Finance regulates the banking industry, and it would have plenty to answer for should all the details of the bank scandals came out. One example: MOF auditors sat idly by while Long-Term Credit Bank of Japan (LTCB), now facing possible insolvency, was caught up in a string of scandals, including the collapse of EIE International, the most corrupt, politically connected real estate developer of the bubble years. No one knows how many similar scandals have yet to unfold, and how badly MOF's failures have hurt the economy. ''People will want to know, what were the finance inspectors doing?'' says Yoshihiko Miyauchi, president of leasing giant Orix Corp. MOF alumni also hold senior positions throughout the troubled bank sector.
So it's no surprise that the latest bank-rescue plan has started to come apart. Pressured to come up with something before Prime Minister Obuchi's Sept. 22 visit with President Clinton, the LDP made some key concessions to the opposition bloc led by Naoto Kan, head of the Democratic Party of Japan (DPJ). According to the agreement, MOF would lose its authority over banking regulation, though nobody was sure when. A new collection agency would buy problem loans from lenders. A committee, free of MOF control, would oversee bank bailouts and enforce tougher disclosure rules. The plan also included a framework for putting LTCB under special public ownership. The opposition took that as a sign that the LDP would dismantle a controversial $100 billion bank-bailout fund set up in February.
BRAIN-DEAD. The backtracking started almost immediately. It became clear over the weekend that the LDP did not want to shut down the $100 billion fund, which it had set up to rescue the banks on easy terms without forcing them to disclose embarrassing details, sack their bosses, or declare bankruptcy. The banks are depending on this fund for a soft landing, but Kan and the opposition see it as a way to prop up brain-dead institutions with taxpayer money. Instead, Kan wants any public funds to go to the bank's borrowers and depositors, not the banks' managers. To achieve that, he wants any bailout conditioned on banks' adoption of wholesale management changes, tougher lending practices, and full disclosure.
The LDP also seems intent on carrying through the forced merger of LTCB with a healthy, unwilling Sumitomo Bank, a classic MOF ploy to cover up bank disasters. The opposition thinks nationalization would give authorities more clout to clean up LTCB fast or shut it down. ''Banks that will fail should be allowed to fail,'' says Motohisa Ikeda, a DPJ member and bank committee chairman in the lower house of the Diet. The LDP and the opposition say they will try to revise the reform bill. But given their differences, it will be tough.
An immensely popular figure, Kan offers a lively counterpoint to the gray monolith of LDP policy. But it's too bad this raucous debate did not start five years ago. Now, it's hard to see how a long and drawn-out battle between the LDP and the opposition can be avoided. Obuchi may already be planning to blame political turmoil for any failure to pass a bank-bailout plan. ''We have to deal with Parliament, and it will [pass] the measures needed to achieve stabilization,'' he said at a New York press conference.
Many political analysts think that Obuchi's failure to deliver a viable bank plan to Clinton will weaken him even further. If that's true, then the most progressive members of the LDP could bolt for the DPJ and deprive the LDP of a working majority in the lower house. The LDP could then try to form another government. Should that effort fail, a general election would ensue that could result in victory for a Kan-led coalition.
Kan's brinkmanship is helping to expose the shell game being played by the LDP. The risk is that a bitter electoral campaign would paralyze policy and spook the markets. Big Tokyo banks have been all but cut out of international money markets, which are charging the Japanese a premium of up to 70 basis points over benchmark lending rates for any fresh capital. The banks are also under assault at home by the steep declines in the Nikkei and a new batch of loans turning sour because of plummeting corporate profits.
With no political leadership, there's no bank workout. With no bank workout, there's no recovery. ''These are tough times,'' says Honda Motor Co. President Hiroyuki Yoshino, ''and if no [bailout] agreement is reached, things could get tougher.''
Indeed, if the government can't take the lead on overhauling the banking sector, the markets will--and it won't be pretty. LTCB was pushed to the edge of insolvency by a sudden and sustained sell-off this summer that has driven its stock down 90%, to about 15 cents per share. The stock plunge drove up LTCB's cost of borrowing to unsustainable levels. Other banks could suffer the same fate, given the government's refusal to disclose credible numbers on the banks' balance sheets. If Tokyo came clean about the condition of the banks, then at least investors would have real numbers to work with. That would be a first in Japan. But the politicians running the country cannot bring themselves to do it.
Copyright 1998,by The McGraw-Hill Companies Inc.
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