April 25 (Bloomberg) -- Nomura Holdings Inc., Japan's largest brokerage firm, reported a record quarterly loss after setting aside $1.26 billion in case bond insurers can't cover losses on securities.

The net loss of 153.9 billion yen ($1.5 billion) in the three months ended March 31 compared with profit of 33.1 billion yen a year earlier, the Tokyo-based firm said in a statement today. The loss was 15 times larger than the most pessimistic estimate among six analysts surveyed by Bloomberg. Nomura fell 3 percent to 1606.11 yen in German trading after the announcement.

Nomura follows New York-based Merrill Lynch & Co. and Citigroup Inc. in reducing the value of bond-insurance contracts after a slump in subprime-infected mortgage securities triggered more than $300 billion in losses and writedowns worldwide. Chief Executive Officer Kenichi Watanabe, reporting earnings for the first time, must also contend with a 27 percent drop in investment banking fees and an insider trading scandal.

``It's clear they haven't managed to boost their main businesses to cover the losses, and that's problematic,'' said Yoshihisa Okamoto, a fund manager at Mizuho Asset Management Co. in Tokyo, which oversees the equivalent of $26 billion.

Nomura declined 12 percent this year in Tokyo trading, while No. 2 Daiwa Securities Group Inc. fell 7.5 percent and the benchmark Topix index dropped 9.2 percent. Daiwa posted its first quarterly loss in five years on April 4 after the value of fixed- income investments fell.

No Guarantees

The firm reported 22 billion yen of losses from its U.S. commercial mortgage business. About 132 billion yen was put in reserves for potential writedowns related to the bond insurers, Chief Financial Officer Masafumi Nakada said at a press briefing today.

``We can't predict future risk, but we've done everything possible to account for our commercial mortgage-backed securities and monolines based on the information available,'' Nakada said.

Ambac lost 96 percent of its stock market value the past year after losses from insuring collateralized debt obligations raised speculation that the company and its competitors would be stripped of AAA ratings, crippling their business.

Nomura had a trading loss of 111.8 billion yen in the quarter, compared with profit of 97.5 billion yen a year earlier. Revenue tumbled 79 percent to 126 billion yen.

``Turmoil in the bond and forex markets led to a tough trading environment,'' said Takehito Yamanaka, an analyst at Goldman Sachs Group Inc. in Tokyo.

Subprime Losses

For the full year ended March 31, Nomura posted a 67.8 billion yen loss -- the first since the company began reporting results under its current structure in 2001 -- compared with a 175.8 billion yen profit the previous year.

Nomura, the top-ranked adviser on Japanese mergers and acquisitions last year, has slipped to third place this year behind UBS AG and Goldman Sachs, according to data compiled by Bloomberg. It advised on 24 Japanese deals worth a combined $6.7 billion in the three months ended March 31, down from 41 worth $9.9 billion a year earlier, Bloomberg data show.

``It's difficult for Nomura and other Japanese brokerages to boost profit at home,'' said Hiroyoshi Nakagawa, who helps oversee about $1 billion in Asia equities at Societe Generale Asset Management Co. in Tokyo. ``Nomura and other Japanese securities firms have to improve investment banking operations.''

Commissions decreased 24 percent to 81.4 billion yen for the quarter, while investment-banking fees fell 27 percent to 18.7 billion yen.

Insider Trading

Adding to Watanabe's challenge, Japan's securities-industry watchdog is investigating allegations of insider trading by an employee in Nomura's mergers and acquisitions advisory department.

Watanabe said April 22 the employee, who joined the department in February 2006, was fired for violating internal rules including bans on insider trading. The Tokyo District Public Prosecutors Office arrested 30-year-old former Nomura employee Li Yu, a Chinese national, it said in a statement.

Japan's Pension Fund Association, which manages 13.2 trillion yen of retirement assets, stopped placing stock-broking and bond-trading orders through Nomura until the regulator has completed its probe and Nomura has shown it's in compliance with regulations.

Saitama prefecture removed Nomura from the team of companies planning to underwrite the regional government's sale of 20-year bonds, replacing it with Goldman Sachs Group Inc., according to faxed statements from Mitsubishi UFJ Securities Co.

The Saitama government was concerned that investors would withdraw purchase orders after news of the insider trading investigation, a Saitama finance official said, declining to be identified because no official statement has been published.

``It is inevitable the insider trading investigation will affect their business significantly,'' said Mizuho's Okamoto. ``Given the market conditions both for bonds and stocks, we can't really count on them to do well going forward.''

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: April 25, 2008 12:04 EDT