Edited by Peter Lee
Maastrickery
The French government has staked its life on bringing down the country's budget deficit, but capital markets sources believe it is unlikely to achieve its goals. If it doesn't, that will lead to some emergency funding and probably some bond issues in the first half of the year. Sources at several large investment banks say they are already negotiating with the French treasury to handle new issues that would cover an expected Ffr15 billion to Ffr20 billion shortfall in financing the social security system.
The government already plans to net Ffr290 billion through government bond issues this year. But bankers predict they will need even more to cover a shortfall in the budget that could be as large as Ffr140 billion. These bankers expect public bond issues to exceed the planned total by at least Ffr30 billion to Ffr40 billion.
The bonds may enjoy a strong reception. Hopes for further French interest-rate cuts have attracted foreign buyers. Other investors have taken some comfort from the government's stated commitment to economic austerity. Last November, a single foreign bank snapped up half of the Ffr17.8 billion bonds sold by the government under its OAT auction.
It is not clear how much of the expected shortfall will be funded through bond issues, but the government's options are narrowing. "It's not likely that taxes can be raised any further," says one banker, "and the government has already made severe spending cuts".
Prime minister Alain Juppé wants to raise the social contribution tax from 1.1% to 2.4%. The government says that this will bring in almost Ffr40 billion, but economists say that it is unlikely to contribute more than Ffr25 billion, given the state of the economy. "The government has been too optimistic in determining economic growth," says Eric Chaney, an economist at Morgan Stanley in Paris. The government has set its deficit reduction policy assuming GDP growth of 4.5% for 1995, when economists feel that the actual rate is 4% or less. One of the constraints on growth has been poor consumer confidence following tax hikes.
Some capital markets sources say the French government will attempt a kind of private bond deal: Caisse des Dépôts et Consignations (CDC), a government finance agency, will buy an entire bond issue covering almost half the social security debt of around Ffr150 billion. In this way, the extra borrowing, which would detract from the government's efforts to comply with the Maastricht criteria, would not be visible. "And the government would avoid the negative impact on the bond market that large issues to finance the social security debt would inevitably cause," says David Naudé, an economist with JP Morgan in Paris.
CDC bought back some government debt last year to help the state reach its goals. It's not certain that this below-the-line tactic will be acceptable to French budget watchers at the European Monetary Institute. The CDC could not be reached for comment. And the government is keeping quiet about any plans for private bond issues.
As a matter of routine, at the end of every year the CDC finances a portion of the social security debt. But 1995 was the last year in which it was obliged to do so. The government is creating a new agency, the Caisse d'Amortissement de la Dette Sociale, to finance social security debt. This agency is planning to tap the bond markets directly, and bankers in Paris and London are busy at work on structuring deals.
Additional emergency measures look likely this year. "It is likely that there will be a couple of mini-budgets in the year to come," says Chaney. The government will attempt to raise more money through ever-increasing taxes on alcohol and cigarettes. But such proceeds will be limited and the government will likely resort to some form of borrowing. As one bond trader says: "There are a lot of holes to fill." Andrew Rosenbaum
US REGULATORS
NYSE raps Nomura
John Fitzgibbon, who edits an industry newsletter called the ipo Aftermarket, was being interviewed last month on cable TV about a popular new stock offering when he first heard the news: "We interrupt this programme to bring you an important business announcement: Nomura Securities has been fined $1 million by the New York Stock Exchange for financial violations."
Vindicated is the only word to express how Fitzgibbon felt. The former vice-president of Nomura's US-based securities subsidiary, Nomura Securities International, was one of the first Americans to work for the Japanese brokerage giant in New York, in the 1970s. Shocked by the practices he saw there, Fitzgibbon tried for years to expose what he claims was a pattern of securities violations.
"These types of things have been going on for 20 years," says Fitzgibbon, who published a book five years ago about his experiences at Nomura and - perhaps even more interestingly - his ill-fated attempts to get regulators and Congress interested in its alleged misdeeds. The NYSE's hefty fine against Nomura confirmed his views. "Fitzgibbon has been talking about these things for years and nobody would listen," says the former head of international sales at a major US brokerage who worked closely with Japanese brokers. "But he was right all along."
Fitzgibbon worked for Nomura for five years before he says he was forced out for his refusal to "play ball". As detailed in his book, Deceitful Practices: Nomura Securities and the Japanese Invasion of Wall Street, Fitzgibbon says he was initially shoved aside for his refusal to falsify a Securities & Exchange Commission (SEC) report related to an convertible bond underwriting for Mitsui in 1975. He later went to work for Sanyo Securities America (SSA), which is part-owned by Nomura. After 12 years, during which time he continued his investigations of Nomura, Fitzgibbon was fired after a former Nomura executive became SSA's president.
Nomura executives tend to dismiss Fitzgibbon and his book, saying the information is outdated. "He hasn't a clue as to what Nomura is like today," says Ira Sorkin, who holds the newly created position of chief legal officer at Nomura Securities International and sits on its executive committee. Sorkin, a former administrator of the New York office of the SEC and a former deputy chief of the criminal division in the Manhattan US Attorney's Office, joined Nomura six months ago. He is also quoted in Deceitful Practices as having told Fitzgibbon that Nomura had no compliance system in 1984, when he was at the SEC. Sorkin says he doesn't remember the interview with Fitzgibbon but notes: "The firm in 1995 is as much like the firm in 1984 as a supersonic Concorde is to World War II biplanes." Today, he says, Nomura's New York office is totally "Americanized". The shift supposedly began when Max Chapman, the former Kidder Peabody president, joined as chief executive in 1989. However, the NYSE disciplinary action involves trading that occurred after Chapman arrived.
The leniency of Japanese regulators towards their financial industry has become common knowledge in recent years. But it appears the US regulatory community also had a hands-off approach to Japanese institutions operating in the US - until recently. The Fed's closure of scandal-plagued Daiwa Bank, followed by the NYSE's $1 million dollar fine against Nomura for its violation of net capital rules, shows that the US regulatory attitude is shifting. The NYSE action required Nomura to include outsiders on its board of directors and also have outsiders review its supervisory systems, procedures and practices - an apparent vote of no confidence in its controls.
That's a far cry from what Fitzgibbons encountered among the regulators in the 1970s and 1980s. He says he was frustrated, and puzzled, by their laissez-faire attitude towards Nomura. According to Deceitful Practices, Nomura's misdeeds included neglecting to license its salesmen, refusing to institute a compliance system, selling unregistered securities, rigging underwritings and engaging in illegal wash-sales to make the trading activity in US government securities appear hefty enough to warrant being granted a primary dealership. Yet the SEC never took any action, and Fitzgibbons' attempts to get a Congressional committee to investigate the firm went nowhere. (Although he offered up several names of willing sources for the Congressional investigators, they said they could not get enough confirmation of his claims and dropped their pursuits.)
"The people to blame are the enforcers," says Fitzgibbons, who claims it was "all politics". "Nomura was given carte blanche here," says Fitzgibbons. The Japanese holdings of US treasuries gave Nomura and other Japanese financial institutions political clout, he suggests.
The NYSE was the one regulator to have taken action against Nomura previously. In 1990, it found it in violation of net capital requirements during a time when Nomura was trying to build up its US government trading to wrangle a primary dealership. However, it appears Nomura did not learn from the experience, and this time the NYSE was tougher. In both cases, the NYSE says Nomura had been accounting for sales and pur-chases of bonds inaccurately, to keep from placing its regulatory net capital position in deficit. (The earlier action involved US government securities; the latter Mexican bonds.) For the second time, the NYSE says, Nomura did not consult with regulators, outside counsel or outside accountants on the matter.
Nomura consented to the latest NYSE action without admitting or denying guilt. In a press release, Nomura confirmed it had agreed to pay the fine and to appoint an outside director to chair its audit committee and to sit on its compliance committee. It added that since 1992 Nomura had undertaken steps to strengthen its legal, compliance and audit departments. One such step was to create the position Sorkin now holds. Sorkin says that the trades in question began in 1990 and became known to senior management in June and July of 1992. The trades were a "grey area" which the firm realized regulators might take issue with. According to the NYSE's interpretation, they would have put Nomura into a net capital deficiency of over $150 million by October 31 1992. As a result, Nomura decided to move the trades to the holding company to avoid any potential net capital violation even before the NYSE learned of the transactions. The NYSE, however, says that Nomura did not make the transfer quickly enough. Trading activity ceased in February 1993 on the instruction of the exchange.
Sorkin says there was no literature by any regulator, or any case law, to indicate that trades were being treated improperly. He says technical difficulties kept the firm from moving the trades as quickly as the exchange desired. Nomura settled with the exchange to avoid spending more money and management time in fighting the case, he adds.
Still, Nomura's perceived economic clout can silence its critics. Publisher Simon & Schuster originally planned to publish Fitzgibbon's book but held it on legal review for 13 months after Nomura threatened to sue against the author of a much more favourable book, The House of Nomura. Simon & Schuster then dropped the book and Deceitful Practices was eventually published in 1991 by a small New York publisher, Carol Publishing. Only 25,000 copies were released, to little fanfare. Michelle Celarier
