Yamaichi Securities Decides to Shut Down

TOKYO, Nov. 24 (Monday)—Japan braced for fallout from the country's largest corporate collapse in its history as Yamaichi Securities Co., Japan's oldest and fourth-largest brokerage, announced today it would shut its doors.

Japanese Finance Minister Hiroshi Mitsuzuka said today that the government was taking measures to ensure that the collapse does not cause major turmoil in world markets.

"We have taken sufficient steps not to let the Yamaichi closure affect overseas markets and we will also do everything to maintain credit order," Mitsuzuka said, according to Kyodo news service.

Japanese authorities had been working with central bankers in the United States and Europe over the weekend to try to prevent panic in global markets over the deepening financial crisis in Japan. Yamaichi Securities is the third major Japanese financial institution to collapse this month, and it will leave behind massive amounts of liabilities.

Yamaichi has $23.8 billion in liabilities, but its collapse could burden the financial system with a far heavier amount of debt, estimated at $53 billion by Japanese news media. That's the amount of liability held by the 40 investment management, finance and property affiliates in the Yamaichi group, according to news media. Many are expected to fail as well because Yamaichi Securities is the core company in the group and has often had to bail out some of the affiliates.

A number of financial institutions, including some already weak banks, could be saddled with significant bad debt if Yamaichi is unable to repay its loans, according to media reports. Finance ministry officials said the securities company's assets probably exceed its liabilities, but analysts said that Yamaichi's finances are murky.

Indeed, this weekend finance ministry officials revealed that Yamaichi had hidden $1.58 billion in losses off its balance sheet. News media reports said the losses were from illegal trading practices in which brokerages temporarily shifted investment losses from one client to another to allow a customer to avoid reporting losses. The losses were hidden in offshore dummy companies, according to news media here.

One American banker in Tokyo said the hidden losses are "a jolting reminder" that major unseen risks remain in even the largest institutions here, because accounting and disclosure rules here enable banks and other companies to hide many of their financial problems.

Already banks and foreign equity investors have pulled large amounts of money from southeast Asia and South Korea. Japanese authorities are moving today to try to prevent a similar run on Japan.

Markets are closed in Tokyo today for a national holiday, so the first major test of the market reaction will be in Hong Kong and London.

Bank of Japan officials today approved special loans to protect clients' assets. American and European financial institutions that do business with Yamaichi were scrambling to find out whether the guarantees would cover their accounts and credit lines as well, according to industry sources.

Yamaichi's collapse is expected to make it more difficult and expensive for Japanese financial institutions to get the short-term loans they need to conduct business. In just one month, Sanyo Securities Co., 10th-ranking commercial bank Hokkaido Takushoku Bank and now Yamaichi have collapsed after creditors cut off short-term funding as market confidence waned.

In the past, creditors assumed that the Japanese government would prop up Japan's largest banks and brokerages, which are still struggling to rid themselves of bad debt and liabilities incurred after the economic bubble burst in the early 1990s. But deregulation and the ballooning costs of rescues has made such attempts impractical.

In addition, the economic tumult in Asia and the worsening domestic economy has caused bankruptcies to soar, making worse the banks' problems with bad loans.

In recent weeks, ratings firms have become more concerned about the health of Japanese banks and brokerages. U.S. ratings firm Standard & Poor's Corp. said it was downgrading or putting on its credit watch several major banks and brokerages. Standard & Poor's said it had "growing concerns about the instability of Japan's financial markets."

Yamaichi has been struggling since the Tokyo stock market collapsed in the early 1990s. Recently, customers started leaving in droves this summer when the brokerage was caught in a government investigation into its relationship with sokaiya, or corporate racketeers. The continued loss of business and rumors about the payoff scandal made it increasingly difficult for Yamaichi to arrange short-term funding for its operations.

The collapse will result in the loss of about 7,500 jobs in Japan and at 33 overseas offices.

Yamaichi's shares closed at 102 yen on Friday, down from its high for the year of 525, set in early January.