Financial Markets Playing Favorites

Company myths can be misleading. At Nomura Securities, Japan's largest brokerage house, the corporate lore is rich with images of untiring devotion to the interests of the small investor. But when push came to shove during last year's disastrous decline in the Tokyo stock market, Nomura ignored its own myth. Rather than helping small investors, the company furtively paid out millions of dollars to a few large corporate customers to cover losses they had suffered in the market's fall. Even worse, Nomura had allegedly helped arrange loans to Susumu Ishii, the onetime leader of one of Japan's largest crime syndicates. Last week Yoshihisa Tabuchi, the company's president, resigned to take responsibility for Nomura's damaged reputation.

Only hours later, Takuya Iwasaki, president of Nikko securities, the country's third largest securities firm, went before cameras to say he too would step down. Iwasaki was taking responsibility for Nikko's spending $136 million to compensate rich investors and for loan dealings with ex-crime boss Ishii.

Not that the practice of compensating favored customers for losses is uncommon in Japan, nor is it necessarily illegal. Government regulations only forbid companies from promising "in advance" that a customer would be compensated if market losses occur. Then why the outrage? For one thing, the amounts paid to wealthy customers were large, estimated at $465 million for the Big Four firms, which cut into profits that should have gone to stockholders. Then there was the question of fair play in favoring big customers over small ones. Add to that the unsavory (but probably legal) loans to a crime boss, and the crisis of confidence gained momentum.

All last week, the Tokyo stock market was jittery with rumors of fresh revelations. The market closed 4% lower than when Tabuchi announced his resignation. The episode may not result in any significant alteration in the practices of the securities industry, but Tokyo's stock slump has already changed world business. While many Japanese companies remain well off, they do not have as much cash to spend on projects and acquisitions as they once did.