Yamaichi job losses could be just the start of it


Could this be the first mass case of rogue trading? Just days after Credit Suisse said it had dismissed a trader for amassing a huge unauthorised options position, Yamaichi yesterday announced that it had suspended 50 staff on full pay. Alas, the reality is rather more mundane.

The suspensions were nothing more, it transpired, than a case of the Japanese broker sticking to the letter of EU rules on consultation ahead of a round of redundancies. The end result remains pretty much unchanged, but these days employers are required by law to discuss your sacking for a month before handing over the P45.

That Yamaichi should be reining in its London office comes as no surprise to anyone who has followed the less than glorious assault of the Japanese on the City. The complexities of Japan's arcane accounting standards make it difficult to be sure, but no one believes any of the so-called Big Four have made much of a return on their expensive British investments.

If the Japanese as a whole were struggling, Yamaichi was always likely to be the hardest hit. The smallest of the four, Yamaichi has never been as convincing as Nomura, Nikko and Daiwa in their global ambitions.

Difficulties at home, following yet another gangster payoff scandal and the resignations of most of its top brass, meant Yamaichi was also going to need to pull in its horns overseas to focus on restoring its credibility in Tokyo. The wider implications of the cull at Yamaichi's London office remain unclear. Although many of the Japanese firm's problems are specific to itself, Yamaichi is not the only investment bank in London to have geared itself up massively to high levels of business which have simply not materialised.

With the exception of NatWest Markets, most appear to have matched huge increases in their cost base with commensurate increases in turnover. Without exception, however, all these firms remain highly exposed if this proves ultimately to be the high water mark in the current business cycle.

There are niches for the Japanese to play for, especially in areas such as leasing, where a fat balance sheet counts for a good deal more than local knowledge. But as long as their obvious forte, selling Far Eastern equities to European institutions, remains so unattractive, it is hard to see yesterday's redundancies being the end of it for the Japanese.

SBC case was not quite so clear-cut

Now that the dust has settled a little on the record fine imposed last week by the Securities and Futures Authority on Swiss Bank Corporation, it is worth asking again whether the SFA has achieved the right balance. Outside SBC, that was the almost universal opinion at the time. At last, a City regulator with teeth and the courage to use them, was the general view. But with a weekend to sleep on it, even rival practitioners are now not so sure.

Nobody wants to apologise for SBC and its apparent breach of Chinese Walls, but the episode does point up some obvious difficulties in taking appropriate regulatory action in cases like this. The nub of the case against SBC was that its market makers were alerted to the possibility of a bid for Yorkshire Electricity when corporate finance attempted to defray the costs of a planned offer through "contracts for differences", a derivative instrument which enables the client to benefit from any uplift in the underlying security.

SBC had its compliance officer act as intermediary between corporate finance and the market makers in hedging the contracts, thus enabling market makers to guess that something was afoot. As a result the market makers piled into the stock, building up a much larger position than was necessary to hedge the contracts for differences. The SFA appears to accept that there was no proper way for SBC to have done this; whichever way it was done was bound to have alerted the market makers.

Rather the fault lay with SBC's failure to restrain its market makers from taking advantage of their information, the SFA seems to believe. But just imagine what would have happened if SBC had attempted to restrain its market makers. They would then have known without a shadow of a doubt that something was afoot. They would not themselves have been able to do anything with this knowledge, but it is in the nature of the City that all their best mates would have made very good use of it indeed. Thus would a situation where market makers were able to guess at the possibility of a bid be turned into one of undiluted insider dealing. Which is worse?

Since all this happened more than three years ago, the Securities and Investments Board has moved to outlaw undisclosed contracts for differences in bid situations. So the episode shouldn't arise again in any case. Clever investment bankers will always remain a step or two in front of the regulators, however. The rewards of innovation are just too great to allow a roasting from regulators and a pounds 300,000 fine to get in the way. If there's a legal way of making money, investment bankers will always find it.

Teetering on the brink of a soft landing

For an overall impression of the state of the economy at the moment, the Grand Old Duke of York is probably your man. Consumers are up, industry is down, and the economy as a whole appears to be teetering on the brink of a soft landing, half way between boom and bust.

Perhaps it is because this sort of benign outlook is so unusual in British experience that City experts are busily separating into the marching up and marching down camps. Yesterday the gloomier were talking about a recession, the R-word only slightly qualified in their remarks by saying that it applied to manufacturing industry only.

The boomsters, on the other hand, saw the weaker monetary figures as welcome evidence that the four recent interest rate increases are tempering the frenetic pace of consumer spending. But it was not enough to let the Bank of England off the hook, they argued.

In the midst of these contradictions, some things are clear. The strong pound is pretty conclusively doing serious damage to manufacturers' order books. It can only be a matter of time before the official trade figures show the impact on actual export volumes. Meanwhile, consumers are equally obviously spending cheerfully as a result of rising incomes, cheaper imports, and the free share windfalls.

How big each of these opposing effects will be is another matter. The economics profession, for what it is worth, is more or less unanimous in predicting that growth will be slower in 1998 than this year. They disagree only about how much slower. A handful think the export downturn will be enough to trigger an economy-wide recession.

But one thing the recessionary tendency forgets is that the point of having an independent central bank to blame for raising interest rates early and often is that it will prevent the boom from reaching proportions that make a big bust inevitable. Having marched rates up far enough to stop consumer demand overheating, the Bank of England will be able to march them straight back down again.

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