In the 1980s, L. William Seidman oversaw the U.S. effort to clean up its failed savings and loan institutions as head of the Resolution Trust Corp. Seidman recently spent two weeks in Japan advising Tokyo on how to solve its own bank mess. Upon returning, he spoke to Washington-based senior writer Rich Miller. Here are edited excerpts of their conversation:
Q: Is Japan finally coming to grips with its bad-loan problem?
A: They've take a lot of action in the past. They recapitalized the banks. They created an independent bank regulator. They adopted international accounting standards. What they didn't do is take the bad debts out of the banks. There are thousands and thousands of businesses that are not paying the banks and have never been dealt with. That is really at the heart of their problem. The dirty business of closing companies and firing people and restructuring hasn't been done.
Q: How much bad debt is there?
A: It may be 20% or 25% of all loans. Total loans in Japan equal all of gross domestic product. In our country, total loans are 15% to 20% of GDP. It's a huge, huge sector of Japan's economy in default.
Q: Will Japan's current workout plan work?
A: They're talking about getting the bulk of the bad loans off the banks' balance sheets in the next two years. That will be an astronomical accomplishment. They've got to set up a whole agency to do that. But there's no doubt they can do it if they set their mind to it. The [question] is when do you restructure [a] company or close it and fire everybody. That decision is political dynamite. They have never been able to face it.
Q: What about the price of the loans?
A: The Resolution & Collection Corp. [Japan's bank-workout vehicle] is buying the bad loans from so-called solvent institutions. So they have to have a transfer price. That has to be the fair market value. Otherwise you're just propping the banks up and delaying the loss till the RCC sells [the loans.] We are sending them information on the way we did it. We gave them the formulas we used.
Q: Are you more encouraged?
A: I am. You've got a politician in [Prime Minister Junichiro] Koizumi who has been elected on a campaign promise to do something. I've been telling them for eight or nine years, the longer you wait the worse it is. They haven't had anybody who was willing to take it on.