Bank deal heralds bankruptcy in Japan

Further signs of pressure on global financial markets emerged last night with the collapse on a Japanese finance house and rumours of trouble at another US hedge fund following the costly rescue of US-based Long-Term Capital Management last week.

News that an affiliate of Tokyo's most troubled bank - Long-Term Credit Bank of Japan Ltd (LTCB) - has filed for bankruptcy in the country's largest post-second World War collapse came as Japan's ruling and opposition parties finally struck a deal to salvage the banking industry. Two other affiliates of LTCB are almost certain to share the fate of Japan Leasing Corp.

Japan's banks are struggling under the weight of 87.5 trillion yen (£435 billion) in bad loans and, with many close to failure, it is widely regarded as the largest crisis now facing the world economy.

Policy co-ordinators from the main political parties had haggled late into the night to iron out major differences over a broad framework for the bank rescue bill which they hope to pass before the current session of parliament ends next week. After weeks of stalled debate, the two sides agreed Saturday that taxpayers' money would not be used to prop up weak banks.

In a major loss of face to the ruling LDP, the two sides agreed to scrap a Y13-trillion fund of taxpayers' money set up in February to bail out banks crippled by bad loans.

Last night, the main opposition Democratic Party finally accepted a fresh LDP proposal that taxpayers' money be used to help support private buyers which take over failed banks.

At the centre of the crisis stands the troubled Long-Term Credit Bank of Japan Ltd (LTCB) which has pleaded for public money to keep itself afloat until it goes ahead with a rescue merger, an effective takeover, with another bank.

But with the hope of an injection of taxpayers' money now cut off one of the bank's affiliates, Japan Leasing Corp, filed for bankruptcy.

With Y2.4 trillion (£10.8 billion) in liabilities, the collapse was the largest in Japan's post-second World War history.

It eclipsed the failure of Crown Leasing Corp which folded in April 1997 with Y1.3 trillion in debts. LTCB, through its affiliates, extended colossal loans, many of which have now turned bad, during the speculative years of the bubble economy in the late 1980s. In a drastic reform plan announced last month, the bank said it would bail out three affiliates by writing off Y520 billion in loans extended to them and pleaded for taxpayers' money to keep itself afloat. But on Friday, the Japanese government said it would not finance LTCB's offer of support to the three struggling affiliates, including Japan Leasing. LTCB, one of Japan's top 19 banks, virtually collapsed in June when its share price was ravaged on the stock market.

As part of the deal agreed in parliament, LTCB will be nationalised with the government making a forced purchase of its shares at a low price. The shares may then be sold to another bank.

Meanwhile, in the US, the fallout from the near collapse of Long-Term Capital Management, the hedge fund rescued from near liquidation last week, has hit at least one other hedge fund and several investment banks. Convergence Asset Management, a bond arbitrage fund run by Andrew Fisher, another former Salomon Brothers' star trader, has warned investors that the value of the fund is down 1520 per cent on the month and just under 30 per cent for the year to date.