Nippon Credit Bank, which came under state control in December 1998, was sold last Friday to a consortium led by Internet investor Softbank Corp. The contract includes a controversial clause that says the buyer (the Softbank group) can request the seller (the government) to buy back troubled NCB loans that have fallen in value by more than 20 percent within three years of the sale.

The government made a similar loss-covering arrangement when it sold the Long-Term Credit Bank of Japan, now called Shinsei Bank, to a U.S. investment group in March this year. In June, Shinsei Bank requested the government to take over problem loans extended to the failed department store operator Sogo Co., saying their value had dropped more than 20 percent. The buyback deal was widely criticized because it would increase the bill paid by taxpayers.

The Financial Reconstruction Commission, the regulatory body, defended the loss-covering provision this way: According to civil law, real-estate sellers are liable for defects found after the sale. This logic applies to the government sale of a nationalized bank (loans that go sour after the sale are considered "defects"). Failure to honor this provision would lead to a loss of the buyer's trust and consequently to the cancellation of the contract itself. A guarantee of loss protection was needed to ensure the prompt transfer of a nationalized bank to private owners. This explanation is plausible, but it is not credible.