Lessons from Japan's Banking Crisis

Posted by: Chris Palmeri on November 28, 2008

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I just read an analysis from bond rating agency Standard & Poor’s about how Japan dealt with its banking crisis in the early 1990s. From 1994 to 2003, 180 Japanese banks failed. Total cost of the credit losses: $950 billion.

There the government took small incremental steps. There was strong opposition to bank bailouts and a series of administrations that failed to act.

The Japanese real estate bubble burst in 1992. It wasn’t until 1998 that the government began investing in the banks through subordinated debt. The government kept weak banks alive longer than they should have through depostion protection. Eventually the government began purchasing non-perfomring loans. The shortages of capital lasted until the early 2000s though.

Japanese industrial companies also had problems with excess capacity and a shortage of funding. In 2003 the government established an Industrial Revitalizaiton Corp. of Japan to provide capital. One of the lessons learned from Japan, according to S&P, is that it’s also vital for a country to protect big industrial corporations, such as the automakers.

Reader Comments

Jaime Sandoval

November 28, 2008 9:57 PM

US should take the same approach. It is natural for Markets to go through cycles and we are overreacting with all this spending.

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Ballbuster

November 29, 2008 6:09 AM

Palmeri would have you believe that protection of big industrial corporations and bailing-out big banks are the key to economic recovery. Old dogs just don't learn. Failing just like FDR in the '30s, the Japanese government in the 90's prolonged its recession by propping up failed businesses. Not only did the Japanese government prolonged the inevitable death of many companies but it also inadvertently sustained bad business practices. Even today, Japanese banks continue to operated under an obsolete cultural inter-locking system that would confound economist. The ability to hide losses and potential huge liability from public view was the major reason behind the collapse of the number one bank in Japan in the 90's, Dai-Ichi Kango. Two major differences between America and Japan that Palmeri intentionally omitted from his article: Even today, the Japanese saving rate is over 10% while American's is negative and in the 90's Japan had a trade surplus while America had a trade deficit. By selectively handing out facts, Palmeri once again has shown his deceptive journalism. And once again, BW readers are left with questions as to who is buttering his bread or as the cliche goes, with whom he is drinking his cool-aide?

Mike Reardon

November 29, 2008 3:41 PM

The commitment so far from Treasury and the Federal Reserve is $5.7 trillion, that’s a major Federal Bubble created in just 3 month.

I see this whole thing as an enormous supply side injection into the banks with profits after (the bailout) payback that comes off its reinvestment going into the hands of corporate management and investors. Again we get supply side returns from the Bush Administration to management and investors..

And we are getting no real targeted fiscal investment from the $5.7 trillion created in these last three months. I’m moving to a tax on all non-performing assets on the books of major banks to make them think about getting all there own money moving again. And a pox on the Treasury and the Federal Reserve into next year.

Kacey

December 17, 2008 10:35 AM

We have moral and ethical problems; Ex-president of NASDAQ, Bernie Madoff, operates the Ponzi scheme for 20 years for $50 billion. How many more Ponzi scheme in Wall Street? How many crooks are in jail?

1. Federal Reserve Bank is creating money like no tomorrow, the purpose is to keep the liquidity flowing. Instead of making the pie bigger, Federal Reserve Bank is pumping more air and makes a false illusion. When reality hits, it will be very painful for everybody. Inflation will be unseen in history?

2. The whole manufacturing capability is demised. US economy is 70% service related, just like one person makes a pair of shoe, one person sells it, another person polishes it, another person repairs it, and another person just pushing some paper around for that pair of shoe. How can an economy last for very long?

3. Currently, average American has 16 credit cards and carrying $16,200 balances, and people also over burdened by over spending in the past. When people can not borrow any more and can not pay their credit cards, then a bigger avalanche than the subprime crisis will come?

4. The financial institutions is leveraged 30 to 40 times, just like I have 100 dollar in my pocket, but I spend the money like I have 3,500 dollar in my pocket. When I go to a casino and betting 3,500 on a table and I won, I put all the winning in my own pocket, when I lose the bet, Uncle Sam will bail me out. What the hell is this?

5. It is true; the total subprime loan amount is only 5% to 6% of the total loan amount. However, because of the subprime loan, the medium price of home in US is increased 65% in the past 8 years, and income for average person is hardly changed. The home price is most likely to decline for another couple years.

6. This country has negative saving rate, the average person have very little money in the bank today. Most people, if they save anything at all, put it in their 401k (stock market) and the stock market is down 45% from its high of 14,000. The end result is 45% of the savings disappeared. Where is money?

7. The accumulated federal deficit was 5.5 trillion dollar 8 years ago. The deficit is double in 8 years to almost 11 trillion dollar. In this year, the federal Government deficit is more than one trillion. The estimated bailout money tally by Bloomberg News is 9 trillion dollar already. Who is going to pay these?

8. President Obama promised all kinds of goodies, such as tax cut, national health insurance, etc. to American in the total amount of 3.4 trillion dollar. Where is the money? More taxes? More deficits?

9. According to Guardian, a UK publication; US is the world largest user and exporter of child pornography (Japan is next). According to United States Postal Service, the confiscated Child Pron DVD is growing 60% in recent years, 2,200 person are arrested in the past few years. The people committed crime, should be in jail.

10. I am using CEO of Lehman Brothers as an example, Dick Fuld made 490 million dollars and Dick has guts to correct a congressman during a congressional hearing that he only made 350 million dollar, not 490 million dollars.

11. When vast majority of taxpayers against Wall Street bailout, why the congress still pass it? Could it be the congressman added 150 billions of so called "sweeteners" in addition to 700 billion dollars bailout? How much political contribution the congressmen receive from the company operating in American Samoa? The producers of wooden arrows? The rum produces in Virgin Islands?

12. In June 2006, Goldman Sachs spent $2.6 billion for a 5 percent stake in the Industrial and Commercial Bank of China, China's largest state-owned bank. For the fourth quarter, Goldman earned $949 million in profits from this investment. Indeed, most major western banks ‘invested’ in China’s state-owned banks and made several hundred percent profit a year. Goldman Sachs still lost 2.6 billion in Q4. How many years can this last?

13. Here is an example, the San Francisco – Oakland Bridge was damaged in the 1989 Loma Prieta earthquake. To replace eastern half of the bridge, after the design and budget approved in 1997 - it was 1.1billion. But, by 2001, the price tag more than double to 2.6 billion. It doubles again to 5.1 billion in 2004. It was increased again to estimated 8.6 billion in 2007. The completion date is also delayed again and again, the latest completion is 2013.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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