Japan Credit Union Plan Draws Mixed Reactions : Finance: Proposal is likely to raise debate over whether public should help solve banking mess.

Japanese regulators Monday announced their plan for cleaning up a major credit union collapse, and the proposal includes a loan to be footed by Tokyo taxpayers.

The Tokyo assembly must approve the loan to help Cosmo Credit Corp. But its inclusion in the plan is likely to again raise debate over whether Japanese taxpayers should help solve the nation’s banking mess.

Many assembly members and Tokyo Gov. Yukio Aoshima have questioned whether taxpayers should be required to pay for such bailouts. Others support the idea.

Katsuhito Sasajima, banking analyst at the Nikko Research Center, praised the cleanup plan as a potential model for future bailouts in Japan’s troubled banking industry, which suffers from at least $415 billion in bad loans.

“Japanese people have come to understand that financial institutions are in a tough environment,” Sasajima said.

Cosmo, the largest credit union in Tokyo, suspended operations Aug. 1 after a run on deposits prompted by a newspaper article that described the bank’s financial difficulties.

Like many other financial institutions in Japan, Cosmo lent heavily to real estate operators during the high-flying “bubble economy” of the late 1980s when land and stock prices soared.

The collapse of the bubble in the early 1990s left Cosmo with about $2.44 billion in bad loans, mostly in real estate.

According to the Finance Ministry, Cosmo’s operations will be taken up by Tokyo Kyodo Bank, a special institution set up earlier this year to handle the operations of two other credit unions that failed.

Since Cosmo will be handing over to Tokyo Kyodo far more debts than assets, the rescue bank will get heavy infusions of cash: $1.14 billion from the Deposit Insurance Corp., an institution set up to protect investors, and $208 million from the Bank of Japan, the central bank.

Also, major banks that had lent money to Cosmo agreed to forgive 60% of their loans and lend $228 million to Tokyo Kyodo.

The plan also calls for the Tokyo metropolitan government to lend $208 million to an institution set up to handle Cosmo loans that are problematic but recoverable, the Finance Ministry said, warning that the whole scheme will fall apart otherwise.

Sasajima of the research center said Japanese have become resigned to footing some of the bill after the Cosmo collapse and the release last week of Japanese bank ratings by Moody’s, an American rating agency.

The Moody’s ratings, widely reported in Japan, put many Japanese banks in the lowest two categories, D and E. Banks in the lowest category are described as needing outside help to survive.

The Moody’s ratings don’t mean that dozens of banks are actually going to collapse, since by design the ratings don’t account for the traditional safety net provided by the Finance Ministry.

David Atkinson, an expert on banks at Goldman Sachs in Tokyo, argued that most banks are actually in decent shape because they have a huge cash flow to balance their bad loans.

Atkinson said the real problem is getting real estate firms back on their feet and contributing to Japan’s economy. He contended that Japanese tax laws are encouraging banks to write off bad loans without letting real estate developers get out from under their crushing debt burdens.