Why should we bail out banks?

By Kazuo Kojima, Mainichi Shimbun, Friday 22 October 1999

Taxpayers have had to foot a huge bill to save the nation's debt-ridden banks because the government says that if the financial institutions are not saved the economy could collapse.

While most people have accepted the government's line, Masaru Kaneko, an economics professor at Hosei University, is outraged.

Kaneko is furious that taxpayers had to extend a 4 trillion yen lifeline to keep the Long-Term Credit Bank of Japan (LTCB) alive only to see it bought by Ripplewood, a U.S. investment company, for a mere 1 billion yen.

Kaneko argues that the nation should get rid of the politicians, bureaucrats and bank executives who've got no idea of risk management before they bring Japan to its knees.

Mainichi: How upset are you by the fact that taxpayers had to pay massive amounts of money to save bankrupt banks?

Kaneko: As far as the issue of clearing up the problems surrounding banks that had too many bad loans, the Financial Supervisory Agency (FSA) and the Financial Reconstruction Committee never made it clear to the people whether banks would be eligible to receive public funds, whether they should be allowed to go bankrupt, whether they should be sold off, or whether they should be merged so that they wouldn't go under. The standards by which decisions were made are difficult for people to understand.

Then, there's the issue of responsibility. In March 1998, the LTCB received an injection of 176 billion yen of public money. It was nationalized in October of the same year. In March this year, the FSA said that the LTCB had bad loans worth 2.65 trillion yen. By August, that figure had grown to 3.5 trillion yen. What was wrong with the first FSA inspection into the bank's bad loans? If a mistake was made, who's to blame? Without even the slightest explanation to taxpayers, the government gave the bank a further 3.5 trillion yen. How much is the government going to end up handing over? It's only natural that taxpayers are furious.

M: What do you think of the idea of pursuing criminal responsibility as being a condition for a company to be eligible for an injection of public funds?

K: There was a token arrest for breach of trust of the former LTCB president, but what happened to the people actually responsible for sending the bank broke? Other banks got in trouble because of their ties with corporate racketeers, (or sokaiya,) but what happened to the mismanagers? Rather than not having done enough, it's more accurate to say that nothing's been done.

Prosecutors should have thoroughly punished the people who caused the failure of housing loan companies (in the mid-'90s). There were some token arrests, but no one looked into the banks that had made dubious loans to the failed companies (known as jusen). The ruling party didn't want to pursue issues that were touchy for the banks. And the opposition didn't do anything, either.

Because there is no system whereby mismanagers can be punished, the problems just get worse. Even the government's vaunted economic strategy council said that there should be no prosecutions of company executives for three years. That decision is criminal.

M: When the government funneled 685 billion yen of public money into the failed housing loan companies in 1996 there was a massive outcry. Yet, the government is now handing out taxpayers' yen in the trillions. Have the people's senses been dulled?

K: The nation at the moment is like a cancer patient. But instead of treating it by cutting out the tumors fomred by bureaucrats and politicians that are afflicting it, the nation's leaders are only giving a quick shot of morphine to ease the pain. If that doesn't work, they think, then try cocaine or marijuana instead.

What has to be done is, first of all, find out who is responsible for taking the initial risks. Then clarify who is responsible for what happened. Then make clear the type of program that will be adopted to solve the problems. But there's no risk-management system in existence to deal with problems in this way. We, the people of Japan, should be getting angrier.

M: What do you think of the government's decision to abide by Ripplewood's request that the government give the LTCB a further injection of up to 500 billion yen, as well as guarantee any secondary losses?

K: The matter of the secondary losses is extremely unclear. If a loss is incurred, we'll have to give even more money to a company that bought the bank for only 1 billion yen. We don't know if that could happen, or when. There have been no rules or guidelines set up and no explanation of what's going on. It's a perfect example of a society that is not prepared to cope with risks.

Politicians, bureaucrats and bank executives' sense of risk is paralyzed and they're incapable of effective risk management. It's an extension of what's happened up till now. I'm really worried about how far the people are prepared to go along with leaders incapable of dealing with risks.

M: We've been told that without the injections of public money, the nation's financial system couldn't be maintained and the economy would not recover. What do you think of that suggestion?

K: It's just an excuse to avoid taking responsibility. Neither bureaucrats, nor bank executives are prepared to take responsibility, but they keep on asking taxpayers to hand over their money—they're like muggers. If they keep doing that, the moral fibers of society are going to break down.

M: How much public money do you think will be injected into the Nippon Credit Bank?

K: Who knows exactly? Although the bank is smaller than the LTCB, its bad loans take up a greater ratio of its assets so it'll probably be a massive amount. Politicians, bureaucrats and bank executives have a pretty cozy relationship, you know.

M: Do you think there's a chance that the money taxpayers have put into both of the failed banks will not be returned?

K: Absolutely. Yamaichi Securities Co. received preferential loans from the Bank of Japan, but it went bankrupt and doesn't have to pay them back.

M: Since 1995, the government has spent about 100 trillion yen on strategies such as public works projects to try to boost the flagging economy. It's also used an additional 60 trillion yen to prop up the failing banks. How are we ever going to pay for all this?

K: We've been told that it's going to take several generations to pay off the debts incurred by the [now-defunct governmental] Japan National Railways. And those debts only amounted to 23 trillion yen. I've got no idea how we'll ever be able to pay off 160 trillion yen. I often wonder how many times we'd have to create a bubble economy to make enough money to pay off what he owe.