Monday, October 17, 2011

Long-Term Memory?

I worked with a guy who in the mid-nineties once claimed hush-hushedly to have structured a big series of "repair bonds" for the Olympus Corporation. He was not boasting, but trying to help. For this was interesting to me for no other reason than I was managing a reasonably-sized long-short book primarily in Japan, and such information hitherto was (except for precious few) completely unknown to the market. It was concurrent to the exposition that many Japanese companies had such liabilities, yet the analysts I queried about the possibility of such liabilities at Olympus laughed it off with incredulity, as they cheered the stock higher with estimate upgrades and near-ubiquitous buy recommendations.

For those wondering what a "repair-bond" is, it is a financial transaction - typically structured [unsurprisingly] by foreign bankers, primarily (but not exclusively - Hello O.P.L.- U.P.S.!!) in Japan which for an example might replace an existing trading position or security deep under water (with a large typically undisclosed mark-to-market loss) with a long-duration security that they can mark to par, but which really isn't worth par if not held to maturity. There are many flavors of such shenanigans. Many Japanese companies (and Refco!!) used a variation of "pass-the-parcel" to move undeclared liabilities between their multitudes of subsidiaries with differing fiscal year-ends in order to elude the auditors. Others, tried to shuttle the remainder of a position into something more aggressive (like Martin Armstrong's PEI) to try and win-back what they'd lost which is/was almost universally a lousy idea.

The Japanese seem more susceptible to such schemes since losing face is decidedly of great importance - above and beyond the financial loss. So crucial is it, that counterparties devised convoluted pathways to reimburse a financial to avoid embarrassment and culpability on all accounts for all concerned.

Olympus' gargantuan black hole recently disclosed allegedly caused by bizarre transactions with brass-plate offshore entities is of a magnitude not dissimilar to that which was purported to have existed 15 years ago. Yield or investment opportunities for repair have been few and far between. Anything non-yen denominated has imploded, has anything Japanese stock-market related. One must wonder whether the hole is in someway related to these now ancient legacy losses - stuck to Olympus' shoe like a piece bubble-gum. Perhaps the foreign CEO came to understand, whatever his personal inclination to come clean and "Do a Bill Clinton", that this was not, in Japan, as easy as it seemed. Of course, this may not be related to the Zaitech fiddling and diddling clean-up. But, then again, perhaps it might....


RCJ said...

This sounds like a good analysis - I wonder if the American CEO was worried about getting hung by a violation of the FCPA. I worked for the US sub of a Japanese bank and it was always entertaining to have meetings with Japanese execs who were puzzled when we were unwilling to pay "consultants" who hadn't done anything.

Charles Butler said...

Rational face-saving agents, we suppose.

Castanea_d said...

How fascinating! I just learned of Martin Armstrong about a month ago, and read with fascination some of his writings on the Net and listening to two podcast interviews on King World News. I gather that he is now out of jail, and is going to be giving an investment workshop in Philadelphia in December, at several thousand dollars per person. The second KWN interview claims that the workshop is almost fully booked.

He explains his eventual guilty plea as a plea bargain, which considering the lessening of the charges would make sense. He continues to maintain his complete innocence.

Your essay here, and the older one on PEI, shed interesting light on all of this. I have no idea whether Mr. Armstrong is a genius or a con man, or both.

Not least, it is enlightening that he wasn't the only one making transactions of this sort for Japanese corporations. And that some of said transactions might still be having their effect.

I always enjoy your essays.

Anonymous said...

Nicely done.