Yamaichi Securities - Company History

In April 1897 Koike Kunizo opened a shop in his own name in Kabutocho, Tokyo’s stock district, and traded as a broker on the Tokyo Stock Exchange. He forbade speculative positions and made his money on the spread — a deliberately unglamorous business for the era. Reorganized as a partnership in 1907, the firm pushed into underwriting, and in 1910 became the first securities house in Japan to underwrite a public bond issue. The mark it traded under, 〈一, borrowed from the Wakao family of the Kōshū financial clan, would give the company its name.

That name arrived because the work had outgrown the man. Brokerage runs on one merchant’s personal credit; underwriting means standing between issuer and investor and carrying the unsold balance on your own book — more than a proprietor’s shop can bear. In April 1917 the Koike partnership was dissolved, Koike Kunizo moved on to run the Koike Bank, and the staff he left behind founded Yamaichi, with Sugino Kisei as president for the next eighteen years. Putting the shop sign rather than the founder on the door meant the business could continue unchanged after he was gone; the firm incorporated as Yamaichi Securities Co., Ltd. in October 1926. The weight of that nameplate would decide a much harder question in 1966.

The second president showed how thin the margin still was. Ota Osamu, a Tokyo Imperial University graduate and a known figure in Kabutocho, took over in December 1935 and within two years led a purchase of new Kanegafuchi Spinning shares that collapsed with the market. His personal fortune could not cover the loss. He resigned on 4 May 1938 and took his own life with cyanide three weeks later. In September 1943, under wartime financial consolidation, Yamaichi merged with Koike Securities — the successor to the founder’s bank — and Koike Konosuke, the founder’s son, became president. The founding family now ran the company outright.

Post-war Yamaichi grew on assets it held for other people rather than on trades it executed. It entered the investment-trust business in 1951 — income proportional to balances under management, a different animal from commission earned the day an order arrives — and its branch network went from 47 offices in 1952 to 112 in 1962. Its real strength was corporate: when the exchanges opened second sections in October 1961 and mid-sized firms rushed to list, Yamaichi led 129 of the new Tokyo listings between 1960 and 1962 against Nomura’s 86, and by 1965 was lead manager to some 500 listed companies to Nomura’s 340. The relationships ran back to pre-war bond underwriting and the sale of zaibatsu shares to the public.

What funded all this was 運用預り — a device unique to the era. The firm sold bank debentures to investors, then borrowed the certificates straight back for a fee, pledged them for call money or bank loans, and put the proceeds to work. It was self-financing dressed as custody, and Yamaichi used it more heavily than any of its three rivals. The flaw was symmetrical: if investors asked for their paper back, the firm had to sell shares to repay the loans and release the collateral — selling into exactly the falling market that had caused the demand. When President Kennedy announced the interest equalization tax in July 1963 and Tokyo broke, Yamaichi bought into the decline to hold up the share prices of the companies it underwrote, and widened the wound. The year to September 1964 produced a ¥3.4 billion net loss on ¥16.2 billion of revenue; Nomura, in the same market, stayed profitable.

Hidaka Teru, an ex-Industrial Bank of Japan man recruited by the main banks, took the presidency in November 1964 without being told the scale of the problem. Bank examiners found within weeks that the real deficit was ¥28.2 billion, eight times the published figure. The Ministry of Finance had persuaded the major newspapers and NHK into a blackout, but the Nishinippon Shimbun was not party to it and ran the story on 21 May 1965. Customers who had queued 3,500 a day arrived 20,000 strong; ¥28 billion of accounts were closed. On the night of 28 May, at a Bank of Japan villa in Hikawa, Finance Minister Tanaka Kakuei invoked Article 25 of the Bank of Japan Act — unsecured, unlimited lending, used for a single private company for the first time in its history.

Repayment used a device from the post-war bank clean-up: separate the old accounts from the new. A new company was incorporated in July 1966, licensed in September, and bought the trade name and the business from the old one; the old entity became “Yamaichi Ltd.”, whose only job was to repay the Bank of Japan out of profits handed up from the new. Hidaka refused to change the name — replacing eighty branch signs would cost money better spent on the debt — and the listing was surrendered in August at a closing price of ¥20. The new firm opened with 5,200 staff and 78 branches, roughly 60% of its peak and the smallest of the Big Four. Repayment was projected at eighteen years and eight months; helped by a recovering market and a ¥6.73 billion refund when the securities-holding association dissolved, it was finished in September 1969, and the two companies merged back into Yamaichi Securities.

What followed was two decades of recovery that never quite closed the gap. Uetani Kyuzo, president from 1972, pushed the bank-appointed directors out and reasserted independence; revenue for the year to September 1972 was 4.5 times that of 1965 and ordinary profit forty times. The shares were relisted in 1973 and returned to the first section in 1974. But a firm rebuilt by shrinking its branch network was weak exactly where the 1970s rewarded strength: when companies began issuing shares at market price, they chose lead managers by distribution power, and Nomura’s retail army took the mandates. Under Yokota Yoshio, ordinary profit hit records in six of eight years and reached ¥220.9 billion in the year to September 1987 — the same year Nomura earned more than twice that. Fourth place had become permanent.

The habit that would destroy the firm formed in these years. A bond-futures position blew up in October 1985 for more than ¥10 billion. In August 1986 Yamaichi allotted ¥1.5 billion of new Mitsubishi Heavy Industries convertible bonds to a corporate racketeer at the issuer’s instruction — four years after such payments were made illegal — and the internal fight that followed ended with a vice-president’s suicide in January 1987 and the return, that December, of the executive the dissenters had tried to remove. Then in September 1987 losses surfaced in discretionary 営業特金 accounts where Yamaichi had effectively guaranteed a yield: ¥40–50 billion, owed to credit unions, credit associations and police mutual-aid funds. Black Monday followed a month later. With something near ¥100 billion of client losses on its hands, the firm began parking loss-making bonds with companies whose fiscal years ended on different dates. That is where the off-book debt begins.

Yukihira Tsugio became president in September 1988 and immediately set up an unofficial committee to work the hidden losses down in private; by 1989 the hole was said to be back to about ¥20 billion. The instruction on the floor, meanwhile, was to gather ¥1 trillion of discretionary accounts, and the balance is thought to have peaked near ¥2 trillion. Guaranteeing a return was illegal, but clients demanded it openly and the lever they held was the lead-underwriting mandate — the one thing a corporate-facing house like Yamaichi could not afford to lose. Asked by a departing executive to wind the accounts down, Yukihira replied that he knew the danger but could not stop while Nomura kept going, not if the firm meant to stay among the majors.

The chance to clear it came and was refused. After a rival’s loss-compensation scandal in 1989, the Ministry of Finance ordered all such accounts unwound by March 1990; Nomura compensated everything and closed the file, while Yamaichi postponed its largest clients and dealt with half by count and 30% by value — in a year when ordinary profit reached a record ¥233.6 billion and the losses could have been absorbed. Instead the parking moved further out of sight: from exchange-reported trades to direct company-to-company transfers, 飛ばし, visible only to the parties and the broker between them. When ¥45.6 billion of compensation to 64 corporate clients surfaced in June 1991 and the industry took its reckoning, Yamaichi again did not empty the drawer. In December 1991 it bought about ¥200 billion of government bonds through a trust account, lent them to five subsidiaries, and had those subsidiaries buy the impaired securities above market — moving the losses from clients’ books onto its own, beyond consolidation. The total reached $2.2B (¥265bn), ¥158.3 billion domestic and ¥106.5 billion offshore.

Almost no one knew. Executives who urged full disclosure were transferred to affiliates; the securities bureau, told of the scheme in late 1991 and again in January 1992, advised only that what left the country would be out of its sight. When prosecutors raided the firm in July 1997 over payments to a racketeer, the entire board resigned, and Nozawa Shohei — president for two weeks — was told by his predecessors what he had inherited. On 19 November the securities bureau chief asked him to choose voluntary closure; the Tokyo District Court declined even to discuss reorganization the following day. Trading stopped on 24 November, with Nozawa weeping at the Tokyo Stock Exchange that the staff had done nothing wrong. Yamaichi dismissed every employee on 31 March 1998, 101 years after it opened. It was not insolvent even then. Bankruptcy was declared in June 1999 — the first time a Bank of Japan emergency loan had ever gone bad — and the proceedings closed in January 2005.