Scandal-Stricken Nomura Shows No Repentance

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

But for many Japanese who watched the resignation speech of Yoshihisa Tabuchi, president of Nomura Securities Co.--the world’s largest securities firm--on television Monday evening, Tabuchi didn’t seem particularly sorry about Nomura’s payoffs of as much as $200 million between 1987 and 1990 to cover wealthy clients’ stock market losses. Nor did Tabuchi seem contrite about Nomura’s $150-million loan to Susumu Ishii, then head of the Inagawakai, a crime syndicate.

Nomura’s arrogance reflects a confidence that however tarnished its name may be, the company is still unchallenged in managing Japan’s enormous wealth. Indeed, while Tabuchi has resigned as president, he will continue to play a key role at the company as vice chairman.

“The incident will not affect Nomura’s power or its leadership in the field,” says Hideki Nakajima, deputy general 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.”

Nomura was just one of dozens of security companies recently implicated in the wrongdoings. Nikko Securities Co. President Takuya Iwasaki announced at an emergency board meeting Monday afternoon that he would also resign for involvement in the pay-backs and in loans to Ishii.

Because of Nomura’s overwhelming power in the market, the company has come to symbolize the Japanese stock market’s power and its failings.

Recent events have, in particular, damaged Nomura’s effort to clean up its own image and that of the Japanese stock market--a perception that big players can make big money through inside information and that small investors get burned.

The Asahi Shimbun newspaper revealed Monday that Nomura was a heavy backer of stock in Tokyu Corp. during a period immediately following underworld boss Ishii’s purchase of shares in the company. The Tokyo Stock Exchange is investigating whether manipulation took place, according to an official in the exchange’s surveillance department.

The scandal has also hurt Nomura’s standing in Japanese business society. Nomura Chairman Setsuya Tabuchi (who is not related to Yoshihisa) has offered to relinquish his position as vice chairman of the Keidanren, Japan’s largest business lobby. It is also unclear whether he will take over as head of the Securities Dealers Assn. on Sunday as originally scheduled.

Keidanren Chairman Gaisha Hiraiwa said last week that Japan’s securities firms “lack business ethics” and called on Nomura to “live up to its responsibilities as leader of the industry.”

Nomura’s image problems follow a string of bad news for Nomura and Japan’s security industry.

Nomura’s earnings fell in the year ending in March to $800 million from $1.9 billion the year before and aren’t expected to recover until the Japanese stock market returns to health.

Authorities say the brokerage activities have undercut their efforts to restore investor confidence in Japan’s stock market. On Monday, the Nikkei average plunged 509 points to close at 23,765. (Early today, Nomura shares were trading at about $12.60, down 5% from last week before the recent admissions and down 20% from its high of the year in March.) Tabuchi admitted at his press conference Monday that its actions had “cast great suspicion on the transparency and trustworthiness of the stock market.”

The company has also taken some hits in America. Its $100-million investment in Wasserstein, Perella & Co. in 1988 was bad timing, to say the least, coming shortly before the mergers and acquisition business in America collapsed. Neither Nomura nor any of its Japanese competitors have succeeded in any significant way to penetrate America’s financial markets in spite of large investments.

But Nomura’s strength has always been in its home court. And here, analysts say, Nomura remains virtually unchallenged. Few can forget that when America’s stock market seemed in a free fall in October, 1987, Nomura was credited with helping prevent the Japanese market from plunging.

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 of money. While investors may be disgusted with the brokers’ activities, market observers say such scandals have occurred periodically throughout Japan’s history and investors have short memories and always come back to stocks.

As long as Japan remains a major source of money, analysts say, Nomura will remain one of the world’s most powerful brokerage houses.

With more than $10 billion in equity behind it--many times that of the largest U.S. securities firm, Merrill Lynch & Co.--and $4.35 billion in undervalued assets, says Robert Zielinski, who covers securities firms for Jardine Fleming’s Tokyo office, “nobody can touch Nomura.”

Nomura’s recurring profits in the year ended March totaled $1.7 billion, about 40% of the profits of all listed brokers in Tokyo, according to Zielinski. Last year, on a down year, the company generated an impressive $630,000 per employee in revenues.

Although Nomura’s share of total trading on the Tokyo Stock Exchange has slipped from a high of 15% to about 10% in recent years, the company still rules the underwriting business, the profitable process of issuing public shares for corporate customers. With its ability to place stocks and its contacts inside most large Japanese corporations, Nomura maintains roughly a 40% share of the underwriting business.

Also a reminder of Nomura’s reach: Nomura says it even paid off the government. The firm covered losses related to $2 billion in pension funds it manages for the Pension Welfare Service Public Corp., an affiliate of the Health and Welfare Ministry.

So legend is Nomura’s power that Asahi Television anchor Hiroshi Kume suggested on the Monday evening news that the Ministry of Finance’s securities bureau had failed in its supervisory capacity and was really no more than a branch of Nomura. The current scandal was leaked by Japan’s tax authorities who argued that the securities firms should not be allowed to write off the cost of covering customer losses.

Others speculate that in cracking down on Nomura and the other brokerage houses, the Ministry of Finance was actually doing them a favor. Following the crackdown, analysts speculated, the 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.

There are also some suggestions that the crackdown is a power play by the Ministry of Finance, which is 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.

Indeed, 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 near-monopoly of the market.

Nomura has argued that it could emerge the winner in competition with Japan’s largest banks. Nomura’s entree in the banking business, Nomura Finance, is off to an inauspicious start. The company, formed in 1989 with $4 billion in assets from several smaller subsidiaries, is the company that was caught lending money to underworld boss Ishii. The company also paid $10 million to Ishii for golf memberships widely believed to be worthless. Some observers suspect that the gangster may have been blackmailing executives at the company.

“The average person would assume that the gangs have some (dirt) on Nomura or they wouldn’t buy the memberships,” said one 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