Japan's Banking Bailout Offers Key Lessons for U.S.

Cost of $440 Billion Is Seen as Good Deal; Which to Prop Up? As concerns about the mortgage crisis have engulfed U.S. financial institutions, some experts are looking for lessons from Japan's experience fighting a major banking crisis a decade ago. Some big differences already are showing up. Unlike Japanese banks that refused to admit the size of their bad loans for years, U.S. financial institutions began taking action as soon as mortgage-related losses hit their quarterly earnings. While their problems seem far from over, companies such as Merrill Lynch & Co. and Citigroup Inc. already have written off billions of dollars in losses and replenished much of their depleted capital by issuing shares or selling assets. U.S. financial watchdogs also have stepped in quickly to try to limit the damage, while Japanese regulators waited years, until big institutions began to fail. But analysts caution the jury is still out on the fate of hundreds of U.S. banks still sitting on huge real-estate-related losses. As the nation debates how to deal with them, Japan's experience -- particularly on how to spend taxpayer money more effectively in a bailout -- offers clues. Japan spent nearly $440 billion in taxpayer money, mostly from 1998 to 2003, to protect depositors, nationalize the sickest of banks and beef up the capital of other financial institutions. About 70% had been returned to government coffers by last year, according to the Deposit Insurance Corp. of Japan, which is funded by both the government and banks and plays a similar role to that of the U.S. Federal Deposit Insurance Corp. More is expected to be recovered later. Economists' conclusion today: While it was a lot of money, equivalent to about 9% of the country's current gross domestic product, for the most part the nation got a good deal. "When you look back afterward," says Hideo Kumano, an economist for Dai-Ichi Life Research Institute, "the amount actually spent isn't that big." For years, Japanese regulators avoided big bailout plans as the public opposed using tax money to save bankers who had profited from lending to property speculators. But when the failure of two big financial institutions threatened to cause a panic in 1997, regulators implemented what is now considered the most effective of their measures: guarantee virtually unlimited amounts of public funds, so that banks could boost their capital to write off bad loans more aggressively. In 1998 and 1999, the government started to inject capital into banks and eventually put in $120 billion. To overcome public skepticism, the money came in the form of subordinated debt and preferred shares, which provided generous income and were safer than ordinary shares. Such a mechanism was also more acceptable to bankers, who were reluctant to hand over ordinary shares for fear of giving Tokyo greater influence over their operations. Public funds also prompted banks to restructure and consolidate, accelerating a wave of mergers. Some are now so healthy they have become providers of capital to big Western banks: Mizuho Financial Group Inc. took a stake in Merrill Lynch and Sumitomo Mitsui Financial Group Inc. bought shares in Barclays PLC. In addition, banks' share prices rose, generating a profit for the government when it sold its preferred shares. Still, analysts question the effectiveness of funds used to prop up the weakest of lenders, including two large wholesale banks that were nationalized after becoming insolvent. Restructuring of Long-Term Credit Bank, now renamed Shinsei Bank Ltd., cost Japanese taxpayers $70 billion before it was sold to a group of private-equity investors in a fire sale. Another bank, now known as Aozora Bank Ltd., sucked in about $40 billion. While the new owners spiffed up operations and adopted new strategies, the two banks are still struggling to find a place in Japan's crowded banking industry. "The problem was the government tried to save everyone," says Naoko Nemoto, a banking analyst for Standard & Poor's in Tokyo. "They should have taken steps to encourage the exit of the weakest players." One big question for the U.S. is where it would come up with the money to save the banks. Late last month, Congress approved mortgage relief for 400,000 struggling homeowners, which President George W. Bush later signed. The measure also offers a temporary financial lifeline to Fannie Mae and Freddie Mac and tightens controls over the two government-sponsored mortgage lenders. The use of taxpayer dollars is a crucial issue, considering that even with the generous use of public funds, it took Japan more than five years before banks finally regained their health. Just as they started pulling out of their funk, the Internet stock bubble burst and the economy slumped. Banks' bad-loan problems worsened, and in 2002, the government required them to use stricter accounting to evaluate their loans. Banks' lending finally started to pick up in 2004, and the real-estate market began to recover.