Yamaichi Securities Co., the fourth-largest Japanese brokerage, revealed previously hidden losses before going out of business Monday in the largest Japanese business failure since World War II.
Prime Minister Ryutaro Hashimoto told reporters on his plane en route to the Asia-Pacific Economic Cooperation summit in Vancouver, British Columbia, that Yamaichi's hidden losses totaled $2.6 billion. Company officials had said the losses totaled about $2.1 billion.
The Japanese government will make every effort to protect depositors and maintain investors' confidence after the Yamaichi failure, Mr. Hashimoto said. Prompt and thorough financial disclosure will be important in this regard, he said.
Moody's Investors Service, a credit rating company, last week downgraded the 100-year-old company's debt to junk amid a scandal over payments to gangsters that resulted in the resignation of most of Yamaichi's management. Yamaichi's demise is indicative of the tough times Japan's financial industry is experiencing.
Banks are saddled with a quarter of a trillion dollars of bad loans, and brokers face increasing competition in a stock market that has lost more than half its value in the past eight years. For the first time in 50 years, Japan's Ministry of Finance is letting some of the biggest names in finance go under as it prepares to admit new competitors.
"The biggest problem is the massive fraud; the Ministry of Finance is saying, 'We only learned about it recently,'" said Elizabeth Daniels, a banking analyst at Morgan Stanley Japan Ltd. "All these things added together are going to make people in the global markets roll their eyes and say, 'We can't trust these guys.'"
Yamaichi had no choice but to close as it became clear there would be no government bailout and that no company would take it over. Fuji Bank Ltd., Yamaichi's main shareholder and lender, had refused to provide fresh funds.
In New York the Dow Jones industrial average fell 1.4% Monday, and Europe's largest stock markets fell about 2% in reaction to Yamaichi's demise. The German DAX index fell 2.8%, and London's Financial Times index dropped 1.8%. European companies associated with Asia also fell.
U.S. bonds fell amid concern that Yamaichi and other Japanese financial companies would have to sell Treasuries to raise cash. The benchmark 30- year Treasury bond fell about $3.75 per $1,000 of face value, pushing its yield up 3 basis points, to 6.06%.
The Yamaichi closure came a month after the troubles in Asian countries triggered declines in stock markets worldwide. Its demise cast a shadow over Japan's financial stability as it seeks to help bail out South Korea, Indonesia, and other neighbors as a contributor to International Monetary Fund rescue packages.
Yamaichi is the third large Japanese financial institution to fail this month. Hokkaido Takushoku Bank, one of Japan's city banks, collapsed Nov. 17, and Sanyo Securities, one of the country's biggest brokerages, folded a few weeks ago.
Japan has been criticized for coddling sick financial institutions with bailouts or forcing healthier companies to adopt them, perpetuating the problems.
Yamaichi's closure will create business opportunities for other brokers. Yamaichi handled 6.5% of the trading on the Tokyo Stock Exchange-it was the fourth-biggest trader-during the first three months of this year.
Speculation that Yamaichi had large hidden losses recently knocked the stock down to one-fifth its price at Jan. 1.
Still, the ministry said, it was surprised to learn of the $2 billion in losses just a few days ago. The ministry said customers' $190 billion of stocks, bonds, and cash will be protected.
Yamaichi president Shohei Nozawa said at a press conference Monday that he learned of the losses a week ago and told the Ministry of Finance the same day. Toshiyuki Ogura, senior managing director of Fuji Bank, said Yamaichi told Fuji Bank about the losses Oct. 6.
Yamaichi's unreported $2.1 billion of losses began mounting in 1991 as the stock market tumbled.
If the stocks the brokerage bought for large clients fell, it arranged for another client to buy them secretly at a profit to the seller, promising the new buyer would be reimbursed for any loss. If the stocks then rose, Yamaichi incurred no cost. When they didn't, Yamaichi had to eat the losses.
Japan made this practice illegal in 1992. The company said it had compensated "a few dozen" clients before and after 1992.
Mr. Nozawa became Yamaichi president in August. Former president Atsuo Miki resigned after being accused of paying $1.3 million to a blackmailer so the gangster wouldn't embarrass the company at its annual shareholder meeting.
"I didn't know what was going on at headquarters-I trusted them," said Mr. Nozawa, who managed Yamaichi's Osaka branch before becoming president.