Some old Tokyo hands have that creeping feeling of déjà vu when they look across the Pacific at events in the US.
The unfolding crises at Lehman Brothers, Washington Mutual – and before, , at Bear Stearns — have some eerily familiar patterns that evoke those days when Japan’s banks seemed physically incapable of calling a bad loan a “bad loan”, when absurd schemes were hatched in the belief they would reassure investors; and when the dead hand of Japanese bureaucracy seemed to be move silently, ninja-like, behind every financial crisis.
Of course there are always dangers in drawing parallels, not least because ultimately, no two situations are identical and the assumption that one can apply a solution from one problem to another – especially in the world of finance – can lead to both the wrong conclusions and the wrong remedy.
But at this point, some similarities are too striking to ignore, on how officials and executives in the west are approaching problems in today’s investment banking world – everywhere, from Germany to the US – compared with the attitude in Japan around the time of the bubble-era implosion and subsequent bank failures of the early 1990s.
In brief, first, you get denial – banks that were foundering insisting they were in a fine state of health. It’s a common – and, we suppose, understandable – syndrome: Why let your share price tank if you can support it with soothing words?
Then there is obfuscation, the stage at which weasel words, born of great creativity with the truth, are wheeled out – (a la “things are not necessarily going in our favour”). Think, Nippon Credit Bank, Long Term Credit Bank of Japan and – well, here’s a neat list to refresh the memory.
In the US, we’ve seen all kinds of staggeringly optimistic comments from institutions such as from WaMu on Thursday, declaring itself to be “well-capitalised” in virtually the same breath that it forecast a Q3 loan-loss provision of $4.5bn.
Then there were ingenious plots and plans. In Japan, it was always new and marvellous sounding schemes and names for all kinds of vehicles and methods that would remove toxic waste from balance sheets and transform a “bad” bank into a “good” one – though ultimately, as investors found out, there was no way to dodge extreme pain.
This time around, in America, the prize so far for both creative labelling and optimistic plans must go to Lehman and its “key strategic initiatives” – touted earlier this week like some miracle cure that would be unveiled with its dismal Q3 results this week.
Lehman also deserves a Japan bubble prize for its “good bank/bad bank” plan to divvy up onerous property assets between Spin Co and Clean Co, an alluringly simple idea which possibly outdoes the Japanese even in their most financially creative moments.
Then finally, the (sometimes well-hidden) official ‘helping hand‘, as we saw with the Fed over its instrumental role in the sale of Bear Stearns to JPMorgan, and more spectacularly with the bail-out of Fannie Mae and Freddie Mac – and now, if the Washington Post’s report on Friday is to be believed, (and many do believe it), with Lehman.
The Fed and the Treasury Department are “actively helping Lehman Brothers put itself up for sale, and officials are hoping a deal will be in place this weekend before the Asian markets open on Monday,” said the Post.
The parallels (and the lessons) have been apparent for some time. Note this column from the FT’s Gillian Tett’s back in January, where she quoted economist Tadashi Nakamae, who was fretting about a credit crunch 10 years ago: a property bubble had burst in Japan, leaving local banks engulfed in bad loans and prompting a financial crisis.A decade later, guess what, Nakamae “feels an unexpected sense of déjà vu”, she notes.
For as 2008 gets under way, bad loans are yet again undermining major banks, partly due to falling property prices. But this time, the epicentre of the shock is on the other side of the Pacific, in America. “Japan’s banking crisis in the 1990s might prove an important lesson for America’s subprime woes,” Nakamae concludes.
The parallel might have seemed almost unthinkable just a few months ago. After all, Japan’s 1990s banking crisis has gone down as one of the worst in history, generating a staggering $700bn of credit losses. And since then, Wall Street financiers have generally assumed that their own financial system was greatly superior to that in Japan (or almost anywhere else in the world). Indeed, confidence in American finance was so high that in recent years Washington officials have regularly travelled to Tokyo to “tell the Japanese what to do with their banks,” admits one former US Treasury official.
Another economic commentator, Andrew Smithers of Smithers & Co, drew a broader bow, pointing to scarier, macro-economic parallels as well as those in banking and finance in a 2007 paper (“Zaitec and the Convoy System: Unfortunately Japan Leads the Way – Again):
In the late 1980s, when Japan’s bubble was reaching its peak, the excesses where plain to see, credit was too easy, asset prices were too high and profits were being boosted by financial transactions. Despite general agreement on the nature of the problems and their threat to the economy, neither industrial companies nor banks modified their behaviour. Japan’s companies was the object of international scorn for the financial follies of “zaitec” and its banks for the “convoy system”, which assumed that no individual bank could be blamed for what all did and that banks as a whole could not be allowed to fail.
Today it is clear that Japan was, once again, merely leading the way. Both the convoy system and zaitec have become the international rule rather than an example of one country’s exceptionality.
The world has therefore been following the path that Japan pioneered in the late 1980s. The big question is therefore whether the next stage will also be similar to Japan’s subsequent experience. As the credit problems of America and Europe unfold, will their economies fall into torpor even if central banks bring interest rates down to zero, and governments run huge fiscal deficits?