The collapse last week of the fourth largest Japanese securities firm, Yamaichi Securities, is simply the pay back for practices which have long been illegal, securities experts say.
Western sources and sources in the US financial markets have for more than two decades been complaining about the continuation in Japan of practices which are highly illegal in the US and which result in stiff jail sentences for those caught engaging in them in America.
Japanese corporations give almost no financial information to their stockholders. While US stockholders are accustomed to receiving massive 10-K reports which are often more than 100 pages in length, investors in Japanese securities receive a one page summary sheet which contains almost no financial information at all.
It is only recently that laws were passed making it illegal for Japan corporate executives to pay bribes to induce disgruntled stockholders not to ask embarrassing questions at public stockholder's meetings.
All major firms in the Japan stock market have primarily "stable investors". In summary, Corporation A buys a large block of stock in Corporation B, while Corporation B buys an equally large block of stock in Corporation A, and so on. Through this practice, it becomes impossible for outsiders to take over a Japanese corporation and to throw out inefficient or even corrupt management.
This practice is illegal in the US.
The practice which has brought down Yamaichi Securities and is expected to bring down all of the other major securities firms in Japan in the next few weeks is the "parking" or "wash trading" of securities. This practice was made illegal in America by the Securities Act of 1933 but has continued to be practiced by all of the major securities firms in Japan.
This practice is known in Japanese as "tobashi" which translates to mean "flying investments".
Although this practice was made illegal even in Japan during a similar but much smaller financial crisis in 1991, it has continued unabated until the present. The penalties are light and call for a maximum sentence of 6 months in jail. By contrast, Michael Milkin, a US securities trader, was sentenced to ten years in prison by a former Playboy Bunny, Judge Kimba Wood, for doing something which nobody including Judge Wood could figure out what he did or what was wrong with it, except that he made more than a half billion dollars doing it.
Another banned practice is guaranteeing a customer against loss and sharing the profits or losses with a customer. If a securities firm such as Yamaichi Securities recommended to its favored customers a purchase at 180 yen, it will buy the security back at that price and sell the block to Corporation C, with a promise to buy back the position at a later time.
Sources say that all of the major securities firms in Japan have been engaging in this practice for years, always shifting blocks of securities from place to place at prices far above the free market price in the hope that the Japan stock market will rebound and that all of these hidden losses will be of no moment. However, the Japan stock market has fallen from an all time high of around 39,000 yen in December, 1989 to its present level of around 16,000 yen and there is no longer much hope for a speedy recovery.
The accumulated losses which have been hidden by the practice of parking securities are now believed to amount to more than 100 trillion yen, or more than one million yen for every man, woman and child in Japan.
The prohibition against guaranteeing against loss and against sharing losses with a customer is one of the strictest rules of the New York Stock Exchange, of the NASD and of the SEC. Every year, several brokers are prosecuted in the US for even minor infractions of this rule. By contrast, nobody has ever been arrested in Japan for doing this, even though it is a crime in Japan as well and the Chairman of Yamaichi Securities admitted last week to having engaged in this practice.
Although the Government of Japan has assured investors that it will bail out the securities firms and accept the tearful apologies of the executives who have engaged in these illegal practices, sources believe that even the government of Japan does not have enough money to make good on this promise.
Meetings are continuing on a round-the-clock basis between officials of the Japan securities firms and government officials on how to contain and control this crisis.
The Chairman of Yamaichi Securities publicly apologized with tears in his eyes last week for his illegal acts. That was considered punishment enough by the ministry officials in Japan. No arrests have been made and it is clear that none will be, even though the Japanese firms have long engaged in practices which are illegal on a large scale. Rather, the belief is that the taxpayers of Japan and ultimately the world financial market will have to pay for the illegal acts committed in Japan.
Parking securities, "wash trading", guaranteeing against loss and sharing losses with customers were all specifically banned in the US by the Securities Act of 1933 and the Securities Exchange Act of 1934 in the aftermath of the 1929 stock market crash. They have continued to be commonly practiced in Japan.
Not only has the government of Japan shown no inclination to prosecute those engaged in these illegal practices, but, on Thursday, representatives of the three largest US securities firms with offices in Japan were called into the Japanese Securities Exchange and Surveillance Commission and asked to explain their trading in shares of Japanese financial institutions. The US firms under investigation are Merrill, Lynch, Japan, Goldman, Sachs (Japan) and Morgan Stanley (Japan).
Since Yamaichi, Nomura, Daiwa and Nikko Securities are all members of the New York Stock Exchange and are so registered under US Securities laws, and since the top officials of those firms all signed agreements to abide by US Securities laws, there is speculation that they could all be extradited to the US and sentenced to long terms in prison in America, since their practices are clearly illegal under US law and have a severe adverse effect on US financial markets. Whether President Clinton will be prepared to extradite the Yamaichi Chairman and lock him up in the same prison cell with Noreiga is problematic, however.