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Size counts for nothing in Japan's tough new climate
SCANDAL, secretive accounting and the new tougher mood prevailing in Japan's financial world claimed one of its biggest victims when Yamaichi Securities, Tokyo's fourth-biggest investment house, filed for bankruptcy on its 100th anniversary. It came hard on the heels of folding of the 10th-biggest bank, 97-year-old Hokkaido Takushoku (HT), something which officials had declared unthinkable. The irony of Yamaichi was that it should have been salvageable: on paper its liabilities of $25.2-billion were covered by $27.6-billion in assets. There was an additional $3-billion, government officials said, in a capital account to deal with the major reason for Yamaichi's fall, hidden losses of $2.1-billion parked in offshore, off-balance sheet accounts.
Apparent solvency was not enough. The Tokyo markets had suspected the secret losses incurred in so-called illicit "tobashi" trading. In tobashi deals, big clients were spared any share dealing losses by booking these to partners in the Cayman Islands where they would not show up in Yamaichi accounts. This might not have been fatal (since the start of the Tokyo market's 60% fall in 1990 other brokers were fined for tobashi offences but survived). However, other factors were also at work. There was general anxiety about the opening up of the Tokyo bourse to foreign competition and deregulation of commissions - which in New York and London had led to drops of 60% in brokerage revenues. Then came the charges against Japan's four securities giants, Nomura, Daiwa, Nikko and Yamaichi, of submitting to blackmail by "sokaiya" gangsters who extort money in exchange for not wrecking occasions like shareholders' meetings or for holding back embarrassing information. All the firms sacked top managements - in Yamaichi's case 11, including the president and chairman - but were suspended from government bond auctions or underwriting new issues pending the outcome of trials. The final confidence killer, however, was the first failure of a Japanese stockbroker for nearly 60 years when Sanyo Securities filed for bankruptcy protection on November 3 - with debts of nearly $3-billion and excess liabilities of $630-million. The trigger was the refusal of nine creditors to roll over short-term loans of $158-million undermining its capital base after a first half loss of $35-million. Their caution was justified by the discovery this week of 14 off-balance sheet operations which almost trebled Sanyo's dud assets to $1.8-billion. The Sanyo case and the absence of a white knight to take over the seventh-ranked brokers in Japan cast an even darker pall over the securities business. Two blows kicked out any remaining props of hope for Yamaichi. Moody's, the US credit rating agency, was considering reducing Yamaichi's borrowings to non-investment grade. And Fuji Bank, the main shareholder, made no move to alleviate the broker's working capital liquidity position. It was only after Moody's downgrading and the tearful exit of Yamaichi president Shohei Nozawa that Fuji disclosed it had known about the secret tobashi deals some six weeks earlier. The bank had been prepared to help Yamaichi if it came up with a credible restructuring plan but this did not materialise. In addition, it turned out the Bank of Japan, Ministry of Finance and the Securities Exchange and Surveillance Commission had all inspected Yamaichi's affairs without, it seems, checking the widespread reports of its tobashi practices. HT, a major lender with assets of $80-billion based in Japan's most northern island, met its end after a two-year battle to survive. As a "city bank" - one of the top 20 main commercial banks - it was considered unsinkable. Even if the Ministry of Finance would not intervene directly, it could round up other healthy groups to mount a takeover or merger. This was tried but negotiations broke down for a variety of reasons. Most of Japan's banks have problems of their own - the hangover of the burst asset bubble of the 1980s. US investment house Goldman Sachs estimates the "city banks" still have problem loans of $220-billion on their books and writing these down will lead to losses of $98-billion over the next two years. Perhaps the biggest reason why HT found no takers in spite of official encouragement was the discovery that it had its own off-balance sheet troubles - ostensibly non-performing (mainly property) loans of $7.4-billion, or 13% of its portfolio. It is estimated HT's write-offs could be $10-billion. The new hard line is being welcomed by international investors. "Capitalism comes to Japan," said Jesper Koll, economist with JP Morgan Securities (Asia), according to a report on the HT affair in the Wall Street Journal. Last week's closure of another bank, Tokuyo City, with $6.2-billion in assets, because of its bad debts, raised the casualty count to five in the past two months. The Bank of Japan has successfully warded off panic so far. All bank deposits are guaranteed and the central bank provided Yamaichi with a $6.3-billion facility to smooth its unwinding as well as pumping $5.5-billion into the money market. But the overriding question remained: now that size is no longer any protection, how many other big names are in the firing line?
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