Japan: Government invites banks to cook the books

On the face of it, it's not a bad idea: generally, US banks have a much lower proportion of so called non-performing loans than do many Japanese banks. So, adopting a US model of assessing the loan book seems like a good idea.

But it's all smoke and mirrors, and the smoke has been blown away by Enron et al, and the mirrors are being broken by Sarbanes-Oxley and more. After all, a debt is a debt. Simply reclassifying it will not make it any less due, or any more recoverable.

"The plan is fundamentally flawed," said Nigel Morris-Cotterill, a leading counter-money laundering strategist with Silkscreen Consulting in London. "It is the bastard son of US accounting standards and analysts' opinions which gave us the dot-com boom and Enron and Japanese banking decision-making which gave us one of the world's most corruption-ridden loan books. "

The latest plan involves Japanese banks re-assessing the debt to take into account the ability of the debtor to generate sufficient income to bring its account back to order. But the question arises as to who will re-assess the loans and whether they will be impartial. Morris-Cotterill argues that the restating of loans will enable companies to give a more rosy picture of their own position vis-a-vis their bank, and when that fiction is discovered, investor confidence will take a tumble.

The banks, too, will risk adverse reaction when this artificial support of their balance sheets is worked out by the private investor.

Morris-Cotterill says that the plan is simply switching fact for opinion and that the plan may even undermine the Tokyo stock market with the effect that would have on regional exchanges. He argues that the value of the banks' own balance sheets will be artificially enhanced and that, when the illusion is discovered by the ordinary investor, confidence in bank shares will be adversely affected. More, the conversion of debt within the corporate sector will artificially support confidence in corporations whose performance has not, in fact, improved.

"Banking decisions will be based on the opinion of accountants and analysts who have, time and time again, under US rules displayed themselves as naïve, ignorant, greedy or corrupt. We have seen the effect of just how this plays out in Enron and others and in the fact that shareholder class actions are now reaching epidemic proportions in the US," said Morris-Cotterill.