For Foreign Competitors, The Scandal Is Sweet

For many American investment bankers, the crackdown in Japan is welcome. For years, they struggled to break into the Japanese investment banking business. Several times, says one banker, he has been asked to give informal guarantees to potential Japanese clients that an American acquisition will be profitable for two years after the sale. When his bank wouldn't do it, Japanese investment banks would. "Business has been lost as a result of not complying with their requirements," he says.

Now, with the presidents of Nomura Securities Co. and Nikko Securities Co. resigning under government pressure after their firms made similar guarantees to big clients, the playing field for U. S. bankers and brokers in Tokyo is leveling. While Japan's crackdown won't wipe out all of Tokyo's shady practices, foreign firms believe Japan is slowly approaching Western modes of conduct. "It is good news," says Elizabeth Allan, who manages the $360 million Japan Fund Inc. "The authorities are finally putting teeth in their regulatory role."

Even U. S. firms doing big business in Japan have long complained about such practices as Japanese brokers steering new stock and bond issues to favored local customers. In 1990, Salomon Brothers Inc. had a messy row with Nomura when the latter pressured key Japanese clients to drop underwriting deals with Salomon. Now, with Japanese competitors under fire, U. S. brokers such as Morgan Stanley & Co. are upbeat about making inroads, especially in fund management.

The scandal is a major setback for Japanese brokers in the U. S. The top houses are barely turning a profit on the $1 billion they have invested in U. S. operations. Now, some must live with the tainted image that comes from dealing with gangsters. "It's very damaging," says a senior U. S. executive at a Japanese broker in New York. "It's like an American firm dealing with the Mafia."

The official worries that U. S. corporate clients, already alienated by market scandals in Japan, will take their financing business elsewhere. The 80 or so U. S. firms that have listed their stock in Tokyo through Japanese brokers since 1985 are frustrated anyway. Despite spending $150,000 a year to maintain their listings, trading of their shares has been light. In the past five years, only about 10 U. S. companies, such as Levi-Strauss & Co. and Avon Products Inc., have sold shares of their Japanese subsidiaries in the Tokyo market.

The Securities & Exchange Commission also may be getting antsy about Japan's scandals. A Nomura official in New York says the SEC has made informal inquiries about whether the latest Tokyo improprieties have any U. S. connection. Another Japanese brokerage official says questions about corporate-disclosure standards of Japanese companies have prompted the SEC to delay a New York Stock Exchange plan to ease its requirements for foreign listings. The NYSE declined comment. The SEC's concerns may escalate after the publication of Deceitful Practices, a forthcoming book by former Nomura executive John E. Fitzgibbon Jr. He charges that the broker's U. S. subsidiary failed to register some employees and skirted other U. S. regulations. Nomura declined comment.

SMALL VICTORIES. Japanese executives are leaning on Max C. Chapman Jr., Nomura Securities International Inc.'s co-chairman, to turn more profits, Nomura sources say. Tokyo opposes Chapman's big-bucks plan to make trading the cornerstone of its U. S. strategy. Nomura sources in New York say relations with merger maven Bruce Wasserstein are also strained. The firm bought 20% of Wasserstein Perella & Co. for $100 million in 1988--but since then, the merger market has tumbled. Wasserstein declined comment.

As the Japanese flounder on Wall Street, Americans in Kabuto-cho, Japan's financial district, are bullish. Equal footing may take years, but even small victories are sweet.

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