No. 4 — February 2, 1996


Weekly Review

--- by Douglas Ostrom

Rube Goldberg is alive and well — at least in terms of the flow charts describing the ever-increasing number of mechanisms to resolve the bad loan problems of Japan's housing loan companies (jusen). The work of the late American inventor of wacky contraptions appears to infuse the layers of complexity building up around the insolvent mortgage lenders. Not a few Japanese analysts have suggested that domestic policymakers should take cues, not from Mr. Goldberg, but from Americans who faced down and appeared to resolve the problems of this nation's savings and loans. U.S. policymakers' adeptness in getting the public to acquiesce to a massive public bailout stands as a key example worth imitating in these observers' view.

One organization going by the moniker "Japan RTC" clearly shows the influence of the U.S. savings and loan debacle of the 1980s, which Congress sought to resolve by setting up the Resolution Trust Corp. in order to take over and attempt to collect bad loans made by savings and loan associations. Most of the Japanese organization's efforts apparently will be focused on the loans of credit cooperatives that failed in late 1994 and last year. Yet, Japanese policymakers appear determined to do their American mentors one better by establishing a second organization that also will act like the RTC in acquiring, and attempting to collect, the loans made by the jusen. This organization, which still is nameless, in effect will take over the operations of the seven jusen (out of a total of eight) that are considered insolvent. Ministry of Finance officials, recognizing that the two RTC-type organizations could come into conflict, also have indicated that they will establish a sort of traffic cop in the Deposit Insurance Corp. Both organizations, of course, will have to develop close relationships with prosecutors, the police and the courts as the inevitably messy process of sorting out conflicting claims continues over coming years.

Both RTC-type organizations will have ongoing relationships with banks, DIC, the central bank and others. Bad loans by financial institutions of all types, but particularly the jusen, have created an enormous financial liability for taxpayers. In a plan adopted by the cabinet of then Prime Minister Tomiichi Murayama in late December (see JEI Report No. 41B, December 22, 1995), and confirmed in January by the new cabinet headed by Ryutaro Hashimoto, taxpayers will be asked to cough up ¥685 billion ($6.9 billion at ¥100=$1.00) to cover the bad loans made by the jusen. That amount, which is included in the FY 1996 budget presented to the Diet for approval, has provoked an angry response across a broad spectrum of the Japanese public.

Few analysts expected that the relatively small budget request would be the last word on the subject, but they may have been surprised at how quickly the next message would arrive. In a January 30 meeting the cabinet signed off on a plan to deal with the so-called secondary losses accruing to the new jusen-related rescue organization once it acquires ¥6.8 trillion ($68 billion) representing loans from the jusen. This amount of assets will be what remains after subtracting both the taxpayer-supplied funds written into the initial FY 1996 budget and the loans written off as unrecoverable in the first go-round by banks and agricultural cooperatives, which together bankrolled the jusen. Both groups have approved a plan whereby they would share with the government the additional losses on a 50-50 basis. While Tokyo has issued no estimates of taxpayer liability for secondary losses, previous projections implied that the likely cost to the treasury in the second round would be around ¥600 billion ($6 billion), effectively almost doubling the overall burden on taxpayers from the jusen bailout to more than ¥1.2 trillion ($12 billion).

By some reckoning the latest government commitments only begin to address the bad-loan pandemic. Last fall the Ministry of Finance estimated that Japanese financial institutions of all types held ¥37.4 trillion ($374 billion) in bad loans as of September 30, 1995. Independent estimates soar up to as much as twice that figure (see JEI Report No. 44A, December 1, 1995). Adding to public concerns, such deposit insurance funds as DIC have little, if anything, in their coffers. The projected ¥1.2 trillion ($12 billion) jusen bailout cost for initial and secondary losses represents only 3.2 percent of the outstanding bad loans calculated by MOF last fall. A fair proportion of the 96.8 percent remainder is likely to end up the responsibility of taxpayers, even if healthy banks, as expected, cover the cost of their own bad loans out of equity and earnings.

If Japanese taxpayers raise such a squawk about costs that represent just 3.2 percent of bad loans, they are likely to be livid for amounts double or triple that figure. Yet, American taxpayers, normally considered a feisty bunch, ponied up with little visible anger roughly five times more per capita to resolve the savings and loan crisis than the amount so far requested of the Japanese public to resolve the jusen problem. Japanese critics argue that American taxpayers at least had the satisfaction when the tax bill came due that the culprits had been put behind bars or at least publicly identified. By contrast, although the Finance Ministry released some information in January regarding the identities of large borrowers from the jusen, many people felt the effort fell short, inasmuch as names were withheld. (Numerous individual corporate borrowers subsequently were revealed in press reports.) Moreover, the process of identifying culpable policymakers has only begun.

The sequence of events in the American savings and loan experience resembles that of the jusen far more than critics of Japanese policy imply, however. The mistakes in policy and business judgment, as well as corruption, that spawned the savings and loan crisis began to be identified years before the Bush administration pushed through legislation establishing the RTC in 1989. It continues even now, as evidenced by the January 26 appearance by Hillary Rodham Clinton before a grand jury investigating, among other subjects, the circumstances surrounding financial dealings and legal work she did a decade ago in connection with a failed Arkansas savings and loan.

One possible reason that, despite a protracted process of identifying mistaken policies and those responsible, American taxpayers did not protest violently when the savings and loan bill came due is that general procedures for dealing with failed financial institutions were in place before the crisis began. Hence, U.S. taxpayers — who not coincidentally were often depositors as well — were aware of deposit insurance and the government commitment it represented. As a result, taxpayer responsibility in this country was not contingent on the identity of those at fault. In Japan, by contrast, DIC has had a very low profile until recently. Japanese taxpayers and the politicians representing them are placing great emphasis on the identity of borrowers, bank officers and policymakers, suggesting that government money will not be forthcoming until some assurance is given that those responsible are brought to justice.

This apparent requirement is likely to make resolution of the problems of the jusen and other failed financial institutions even more protracted than the savings and loan and banking bailouts have been in this country. Many jusen borrowers now in default were guilty of only bad business judgment, not criminal wrongdoing. This suggests that the appropriate course of action is to identify policymakers whose decisions set jusen lenders on what later was to prove to be a wrong course. Eventually the search is likely to result in both bureaucrats and politicians being implicated. One critic has gone so far as to suggest that jusen never should have been established in the first place, given the existence of many other mortgage lenders. This critic suggested that the jusen were established as a means of providing retirement employment for high-ranking Ministry of Finance officials. Other critics have fingered the banks that established the jusen and staffed them with their officers.

The elaborate debt-resolution institutions being put in place obscure the simple need to identify wrongdoing, inasmuch as such structures make more difficult the discovery of the extent of bad loans. To date the Japanese public has not been told clearly the plain truth that for decades taxpayers have faced a huge potential liability should banks and other financial institutions face difficulties. Even now the debate is not framed in terms of losses to depositors. In the event that the jusen losses are not compensated the public is being led to believe that the borrowers themselves or perhaps one or more of the nation's big banks will deal with the problems. Of course, people increasingly understand that all the levers and the handles on these Goldberg-style rescue devices mysteriously have a way of lightening their pocketbooks.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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