Daiwa is Cosmo's main banker and owner of a 4.9 per cent stake. It will end up owning more than 50 per cent of Cosmo.
Cosmo became technically bankrupt by guaranteeing gains on clients' share portfolios, despite losses on the stock exchange. The practice, known as 'tobashi' in Japanese, has been practised by most Tokyo securities companies, in contravention of strict guidance by the Ministry of Finance. Cosmo's chairman Yasuo Bunya has resigned.
Cosmo could no longer sustain the shortfall between the actual share values and the inflated values it was underwriting. The rescue by Daiwa may be the first of a series of bail-outs for troubled securities companies with the same problems.
Daiwa will raise its stake to more than 50 per cent by buying new shares to be issued by Cosmo for between Y70bn and Y80bn. The bank is stepping in because Cosmo's liabilities will exceed its capital by more than Y7.1bn after it posts a special loss of Y69.8bn in the year to 31 March, 1994.
Under a financial reform law that took effect in April, a bank is allowed to acquire a majority stake in a brokerage, but the securities firm is banned from stockbroking.
However, the Ministry of Finance, which is believed to have mediated the rescue, said it would allow Cosmo to continue stockbroking.
Finance Minister Hirohisa Fujii said Cosmo's stockbroking business was vital to it and that the ministry would seek the permission of Japan's Fair Trade Commission to allow it to carry on.
The Ministry of Finance will investigate about 48 other Japanese securities firms starting next week to see if they have been involved in dubious securities transactions, Sohei Hidaka, director-general of MOF's securities bureau, said.
Mr Fujii said: 'I think the Cosmo incident is a special case. I don't believe such cases are widespread.'Reuse content