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Wednesday, March 31, 1999

HLAC, RCB merger creates powerful collection agency


Staff writer

Kohei Nakabo likes to label himself a "weak person," even though he might be one of the most powerful people in Japan today.

The high-profile veteran lawyer has reigned as head of the semipublic Housing Loan Administration Corp. since its establishment in July 1996 to collect the huge loans left behind by seven failed "jusen" mortgage lenders.

Today, the HLAC merges with the Resolution and Collection Bank, which has taken over the operations -- including loan collection -- of over 40 failed banks and credit unions. Nakabo, 69, becomes the first president of the merger's offspring: the Resolution and Collection Corp.

Nakabo says staff solidarity helped speed up work at the HLAC. Over the last two years and eight months, the HLAC has recovered 1.55 trillion yen in loans -- roughly 38 percent of its target by 2011. "A weak person should not complain, make excuses, or remain silent," Nakabo said passionately during a recent news conference. "The weak should speak out and take action."

And exactly what action the new firm takes is bound to affect the future of the economy. The merger between the HLAC and the RCB, part of the financial reform laws enacted in October, signals the birth of a powerful state-backed organ to collect bad loans.

The new entity will continue to recover loans held by the HLAC and the RCB. It will also receive a new lump of nonperforming loans from the Long-Term Credit Bank of Japan and the Nippon Credit Bank, which were both determined insolvent and placed under temporary state control last year.

The LTCB holds some 4.7 trillion yen in outstanding loans to troubled borrowers, which will all be sold to the RCC. The amount of sour assets held by NCB is now being calculated by the Financial Reconstruction Commission. The RCC will also act as the purchaser of nonperforming loans from healthy banks, as the nation's 15 major banks just received injections of public money for recapitalization and are now poised to dispose more of their bad loans.

The RCC was modeled after the U.S. Resolution Trust Corp., which handled America's savings and loan crisis from 1989 until 1995. But the organizational makeup of the Japanese firm and its task will be quite different from the RTC's.

Financial analyst Yasuo Ide of private think tank Fujiwara Office said the RTC succeeded because it used investment bankers and others in the financial industry in the actual loan recovery process. With the private sector's help, the RTC promoted selloffs of collateralized properties through auctions, bulk sales and securitization, he said. This also helped turn the real estate market around, he added.

Yuri Okina, a senior economist at the Japan Research Institute, a private think tank, said the nation's bad loan problem will not be fully resolved unless collateralized real estate actually starts being traded on property markets.

Experts say collateralized properties -- many of which are small plots of land in urban areas -- have remained idle. "(The RCC) should devise ways to make such properties more attractive on the market by adding value," Okina pointed out. "For example, such plots, which look like pieces of a jigsaw puzzle, can be patched together (by buying up surrounding land) into one big piece. The private sector can then offer ideas on the kind of buildings that can be built on the land so it can create cash flow."

Michael Linsk, managing director of the financial advisory services company under Price Waterhouse group, also said the private sector is more skilled at bad-loan disposal. He was involved in the U.S. RTC process as a voting member of its assets disposition committee. "One function (needed in an RTC-like structure) is to safeguard the public interest, to provide the oversight and controls to make sure that public interest is being served," Linsk said. "That, I think, is the legitimate government function. However, the actual resolution of the individual loans doesn't necessarily have to be done by the government sector."

The RCC, however, will aim to solely recover all of its loans, mainly through repayment and collateral selloffs. The firm will be staffed by former HLAC and RCB workers.

The HLAC workforce consisted of ex-employees of failed jusen firms, lawyers, bank workers and government officials such as those from the Finance Ministry and National Tax Administration Agency. Most of the RCB staff were former employees of failed credit unions and bank officials.

The success of the government's debt-collection scheme also hinges on how smoothly the merger goes. Many in the RCB are upset with the way HLAC "took over" the RCB, in such areas as personnel, says Toshihiko Sato, manager of the RCB's general planning department. For the new scheme to work, the RCC should treat employees from the RCB fairly and keep their morale high, he said.

The collection of bad loans from the jusen is expected to become more difficult in the future. The HLAC has already begun facing what Nakabo calls a "bedrock" in its reclamation efforts.

The body has recovered some loans by tracking down and seizing borrowers' assets. It has benefited from the special investigative power given to the Deposit Insurance Corp., its sole shareholder, that enables it to be more forceful than a financial institution in getting its money back.

But even with such a privilege, the HLAC is having a hard time collecting some loans, like in cases where borrowers try to hide their assets overseas. Nakabo estimates that the RCC will collect 425 billion yen in jusen loans during fiscal 1999, down from the 634 billion yen the HLAC collected in fiscal 1998, but still a mind-boggling amount.

Nakabo will see his underdog spirit tested again by the merger -- and he has no time to waste. He has announced that he will resign from the post in August, and has appointed fellow lawyer Akio Kioi his successor.



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