(Off Topic) What would you think if Alan Greenspan leaked Fed moves
to selected investors? Japanese scandal worsens.
"The scale of insider trading appears awesome."
From Asahi Shimbun
Yasuyuki Yoshizawa, a senior official of the Bank of Japan (BOJ) was arrested Wednesday on suspicion of leaking confidential financial information in exchange for 4.3 million yen. New information indicates he allegedly influenced the BOJ's Osaka office to accept risky collateral put forward by Sanwa Bank. In the latest allegations, Yoshizawa--the former chief of the Capital Markets Division of the BOJ's Credit and Market Management Department--is believed to have suggested that Osaka BOJ officials review their conclusion that some of Sanwa's collateral was invalid.
Yoshizawa's suggestion allegedly came after officials of the Osaka-based Sanwa asked for his intercession.
Sanwa Bank had offered promissory notes from an affiliated company for loans extended by the BOJ.
In January 1996, Sanwa Bank announced plans to support the affiliated company, which had been suffering from a serious financial trouble, with bad loans amounting to about 300 billion yen.
Following disclosure of the company's financial crisis, BOJ Osaka officials reported to Sanwa Bank they had decided the notes
issued by the company were worthless as collateral.
Sanwa Bank officials asked Yoshizawa for help to overturn the decision, concerned they would be required to provide
additional collateral.
Yoshizawa apparently succeeded in persuading Osaka officials and told Sanwa Bank officials that the notes would not be
immediately regarded as invalid. The Bank of Japan continued to accept the company's notes as collateral for one more year, until March of 1997.
Yoshizawa's arrest was prompted by allegations he leaked insider information to banks in exchange for free meals and entertainment.
He allegedly provided the Industrial Bank of Japan with key information from a BOJ survey of the nation's economic situation in
December 1995, before the central bank released the survey results in January 1996.
Yoshizawa, who was then working in the Bank Relations Division, ordered his subordinates to examine the confidential
materials soon after BOJ executives approved the documents.
Yoshizawa scandal is just sinking in
The ripple-down effect from last week's arrest is being felt each passing day in ever widening arcs as Tokyo special prosecutors reveal the extent of his suspected crimes. Financial insiders suggest the
scandal is just the tip of an iceberg.
Prosecutors have also discovered that other major banks joined the entertainment spree while Yoshizawa occupied a key post at
the central bank's Credit and Market Management Department--the heart of the institution. Moreover, Yoshizawa's supervisors
were often present when he was entertained.
The leaked information included the hugely valuable quarterly economic forecast reports called tankan, other financial reports and word on policy about the BOJ's open market operations or its buying and selling of securities and bonds to regulate the money supply.
These types of information can directly affect the money market as well as foreign exchange rates and stock markets in this
country and overseas.
Getting the jump on such sensitive information allows banks to bolster their profits or cut their losses by anticipating the direction that markets are headed.
Financial insiders said the leaks of confidential BOJ information did not go unnoticed. They had been observed from time to
time over a period of years. For this reason, they say Yoshizawa's activities are just the tip of an iceberg.
Consider, for example, the tankan published in June 1997. A major bank apparently got a copy of the report in advance. There is
no other way to explain why it sold futures in the call money market just before the tankan was published, the sources said.
The tankan, when it came out, was bearish. It caused futures to fall sharply. At that point, the bank bought back the futures,
making enormous profits.
The scale of the insider trading appears to be awesome. It is an activity that many regard as one of the most abominable crimes
in a free market society. To make matters worse, the central bank and at least some leading banks appear to have been involved
in this sleaziest of practices for years--something that is unimaginable anywhere else.
Yoshizawa is also suspected of having offered favors to Sanwa Bank by making special BOJ loans available. These were
offered at the official discount rate of 0.5 percent--the world's lowest rate--when they found themselves short of funds to meet
their reserve requirements at the BOJ. This prevents ratings agencies like Moody's from assessing their operations fairly, which
in turn sends wrong signals about the banks' standings to financial markets.
It makes clear to everyone the lack of transparency in Japan's financial markets.
The arrest of Yoshizawa takes the matter further because it has undoubtedly destroyed public trust in the central bank for many
years to come. It has dealt a serious blow to financial markets at home and has shown the extent of corruption in Japan's markets.
His arrest could not have come at a worse time. It came when regaining trust in and stabilization of Japan's financial markets
was vital if Japan has any hope of tiding over its financial crisis.
In a sense, his crime, if proved, would be tantamount to treason against the markets, the country and especially the men and
women of this country. How could the Yoshizawa affair happen?
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As I write this the Nikkei is dropping.
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