Pricing Japanese Banks for Bankruptcy is Overdoing It

Many have dismissed the Fed’s unprecedented 75bps inter-meeting cut as an overreaction to plunging equity prices and/or an effort to get ahead of the subprime contagion curve, which they have fallen significantly behind.

However, what if the move was in response to the potential for a much more serious credit crisis that is still working its way through the global financial system?

George Soro’s description of the current crisis as “the worst since World War II”, and statements like “this is not normal crisis” or “central banks have lost control” smack of something more ominous than merely getting ahead of the curve. There is even talk that several extremely large banks of the “too big to fail” size technically having negative equity.

This is beginning to sound increasingly like Japan’s financial crisis in 1997. For most of Japan’s crisis which resulted in the Heisei Malaise, both BOJ monetary and government fiscal policy were essentially powerless to stop a massive unwinding of some JPY200 trillion of debt.

Then, the debt problem was largely confined to within Japan’s shores. This time it is global in that it has already hit financial institutions around the world and will inevitably hamper global economic growth as well.
An equally virulent debate is whether the BRICs, VISTAs and other emerging economies can de-couple from a US recession. The answer in terms of equity markets is mistakenly clear?global stock markets are like Siamese twins in downturns. As for Japan, global investors have already mentally ticked off a recession for Japan, regardless of whether the US has a hard landing and/or there is emerging market decoupling or not.

This has created some very deep value plays, i.e., stocks trading below break-up valuations. The Topix banking sector, for example, is trading at a PBR of 0.32. At these levels, Japanese banks don’t have to conquer the world for investors to make money, they just have to survive as going concerns (which is imminently more likely now than in 2003), thereby erasing the bankruptcy discount, as was the case in the rally following 2003 lows.