When will the bleeding stop?

Mizuho Financial Group, Japan's second-largest bank by revenue, posted a 50 percent drop in full- year profit after losing $5.5 billion on mortgage securities, the most reported by an Asian company.

Net income fell to 310 billion yen ($3 billion) for the year ended March 31, below a January forecast of 480 billion yen, Tokyo-based Mizuho said in a preliminary earnings statement.

Analysts expected profit of 369 billion yen, according to a Bloomberg survey.

Mizuho's securities unit recorded 400 billion yen of trading losses, mostly from writing down the value of investments related to U.S. subprime mortgages. The bank's shares rose the most in a week after Mizuho said the division reduced holdings of overseas asset-backed securities by almost 80 percent to 100 billion yen.

“Management of the securities company was very bad,” said Edwin Merner, who oversees $2 billion as president of Atlantis Investment Researchin Tokyo. “It's good that they're aggressively writing down these securities now.”

Mizuho gained 5.2 percent to 407,000 yen at the 3 p.m. close of trading. The shares have plummeted 48 percent in the past year, wiping out about $40 billion of market value.

The bank may have lost 83 billion yen in the fiscal fourth quarter, based on its 393 billion yen profit for the first nine months. That would be the first quarterly loss since at least June 2004. Mizuho's securities division lost 220 billion yen in the quarter, according to the release.

Trading losses at Mizuho Securities were “mainly due to markdowns related to securitization products amid the dislocation in the credit markets stemming from the U.S. subprime loan issues,” Mizuho said in the statement.

Losses at the brokerage unit, led by Keisuke Yokoo, have forced Mizuho to postpone merging the unit with Shinko Securities to create Japan's third-biggest securities firm. Last month, Mizuho postponed the transaction until next year as subprime losses forced it to revise the deal's terms for a second time.

“Long term, we must question whether the Mizuho group is properly governing its securities arm,” said Keisuke Moriyama, a Tokyo-based banking analyst at Nomura Holdings.

Mizuho waded into the business of repackaging and selling U.S. debt securities just as the market began showing signs of collapsing, hiring a team of bankers from Calyon, the investment bank of France's Credit Agricole SA, in December 2006.

A year later, Mizuho suspended trading and creating U.S. collateralized debt obligations containing asset-backed securities or high-yield corporate loans.

The former Calyon team underwrote $4.4 billion of CDO deals before the markets seized, according to Asset-Backed Alert, an industry newsletter. Mizuho was the 18th-largest underwriter of mortgage-bond CDOs during 2006 and 2007.

Sales of CDOs, used to repackage assets such as mortgage bonds and buyout loans into new securities with varying risks, have plunged as U.S. homeowner defaults sparked unprecedented downgrades and record bank writedowns. CDOs mainly backed by high-risk company loans, such as debt for private equity deals, are called collateralized loan obligations, or CLOs.

Asian banks have accounted for a small fraction of the $245 billion of global writedowns and credit losses announced since the beginning of 2007. Swiss bank UBS AG has written off $38 billion of assets since the credit squeeze started in July.

Mizuho's bigger rival Mitsubishi UFJ Financial Group lost 55 billion yen on subprime-related holdings for the nine months through December. Bank of China on March 25 announced $1.3 billion of subprime writedowns for 2007.

Compounding Mizuho's woes is an economy forecast by Goldman Sachs Group and Morgan Stanley to follow the U.S. into a recession. Confidence among large manufacturers is at a four-year low and businesses plan to reduce investment, the Bank of Japan's Tankan survey showed last week.

Mizuho is the second Japanese bank this week to fall short of its own earnings target, following regional lender Fukuoka Financial Group Inc. Fukuoka Financial said April 7 that full- year profit was probably 2.5 billion yen, 92 percent less than its forecast, after booking investment losses and additional costs for possible bad loans.

Lending by Japan's 10 so-called city banks, including Mizuho and larger rival Mitsubishi UFJ Financial Group, fell for a 12th straight month in March, the central bank said.

So were the losses mainly caused by bad governance, or by the dislocation in credit markets?