Scandal-Stricken Nomura Shows No Repentance

When Japanese companies get in trouble and their chief executives resign, the contrite companies typically promise to hansei suru, to reflect on their deeds, presumably with an intent to reform.

But for many Japanese who watched the resignation speech of Nomura Securities President Yoshihisa Tabuchi on television Monday evening, Tabuchi seemed neither particularly sorry about Nomura’s payoffs of nearly $200 million to cover wealthy clients’ stock losses nor about its $100-million loan to a gangster. And the company certainly didn’t seem intent on reform.

Nomura’s arrogance reflects a confidence that however tarnished its name may be, the world’s largest brokerage is still top dog when it comes to managing money in Japan.

“The incident will not affect Nomura’s power or its leadership in the field,” said Hideki Nakajima, a manager at Wako Securities Co., one of Nomura’s smaller competitors. “The fact that they could compensate customers for such a huge amount just goes to show how much power they have.”

Recent events have hurt Nomura’s image.

In fact, it has contributed money to such causes as performances by the late composer/conductor Leonard Bernstein in Japan to try to overcome its reputation for engaging in unethical stock marketing and trading practices.

Nomura’s earnings, which fell in the year ended March to $800 million from $1.9 billion the year before, aren’t expected to recover soon. Disclosures by Nomura and other major brokerages that they have been guaranteeing returns to their best customers are unlikely to attract individual investors back to the market.

Tabuchi admitted at a press conference that the company’s activities would have the undesirable effect of reducing public trust in the stock market.

Nomura has also taken hits in America. Its $100-million investment in Wasserstein, Perella in 1988 was bad timing, coming shortly before the mergers and acquisition business in America collapsed. The company has also failed to significantly penetrate America’s financial markets.

Nomura’s strength has been in its home court. And here, analysts say, it remains virtually unchallenged. Few can forget how, when America’s stock market seemed in a free fall in October, 1987, Nomura helped turn around the Japanese market.

While Japanese financial markets are in a slump today, dragged down by weak land values, high interest rates and a stagnant stock market, Japanese individuals and companies continue to save and invest considerable sums. As long as Japan remains the source of the world’s capital, analysts say, Nomura will remain one of the world’s most powerful brokerage houses.

With a stock capitalization and assets far above its nearest rival, says Robert Zielinski, who covers securities firms for Jardine Fleming’s Tokyo office, “nobody can touch Nomura.”

Although the company’s share of total trading on the Tokyo Stock Exchange has slipped from a high of 15% to about 10% in recent years, it still rules the underwriting business, the profitable process of issuing public shares for corporate customers. With its broad information network and its market-making abilities, Nomura won the lead role in listing 25 of the 61 companies that chose to be newly traded on Japan’s stock markets in 1988.

So legendary is Nomura’s power that an anchor for Asahi Television News suggested Monday that the Ministry of Finance’s securities bureau was no more than a branch of Nomura. Some analysts have even speculated that in cracking down on Nomura and the other brokerage houses, the Ministry of Finance was actually doing them a favor. Following the crackdown, the speculation went, brokers would no longer have to honor outstanding commitments that guarantee customers 8% returns on their stock funds, many of which have fallen by 25% or more.

Others speculate that the Ministry of Finance was trying to restore its power by punishing Nomura and forcing it to toe the line on financial reform. Nomura has been dragging its feet on the government’s efforts to gradually do away with regulations that divide the banking and securities businesses.

If Nomura has a weakness, observers say, it is the possibility that Japan’s major banks could win the right to underwrite securities, breaking Nomura’s chokehold in that area.

Nomura has argued that it could out-compete Japan’s largest banks. However, the company’s first entrant in the bank business--Nomura Finance--has a record that leaves something to be desired.

The company, formed in 1989 with $4 billion in assets from several smaller subsidiaries, is the one that was caught lending money to underworld boss Susumu Ishii. It also paid $10 million to Ishii for golf memberships believed to be worthless. Some observers suspect that the gangster may have been blackmailing company executives.

“The average person would assume that the gangs have some (dirt) on Nomura or they wouldn’t buy the memberships,” said a police expert on gang activities.

Nomura Securities Financial Data

Year ended March 31 1991* 1990 Revenue $6.9 $8.6 (billions) Net income $796 $862 (millions)

*W. I. Carr estimate

Figures in U. S. dollars at current exchange rate.

Source: W. I. Carr

The Nikkei Average Weekly closes, except latest, of the Nikkei 225-stock average. Monday close: 23, 765.46 Down: 509.62 Source: Tokyo Stock Exchange

World’s Largest Brokerages Common shareholder equity, in millions of U.S. dollars. Figures for Japanese firms are for the year ended March 31, 1990; for U.S. firms, the figures are for the year ended Dec. 31, 1989.

Nomura Securities 11,798.02 Daiwa Securities 6,405.68 Nikko Securities 5,598.12 Yamaichi Securities 4,941.27 Merrill Lynch 3,151.30 Shearson Lehman Hutton 2,200.00

*Sources: Worldscope and Institutional Investor

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