The Story Behind the Olympus Scandal

There's an excellent (longish) article giving some behind-the-scenes information about the Olympus scandal from Michael Woodford's point of view at Bloomberg Businessweek. The article was written by Karl Taro Greenfeld.

Mike
(Thanks to J.G.)

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Original contents copyright 2012 by Michael C. Johnston and/or the bylined author. All Rights Reserved.

Comments

[Ned]

Does this picture look like a billboard for a movie or what? Can Michael Woodford act? How many CEO's would pose for a picture like that? The longer this goes on the more silly he looks. This thing is turning into a circus.

[Eric Rose]

Woodford has become a publicity hound by necessity. I am sure his debts are sizable due to this debacle and he needs to add fuel to the fire to increase book sales. A movie deal would be icing on the cake for him. As far as the article, don't waste your time, nothing new there.

[Speed]

A Bing image search for "Michael Woodford" returns pages of pictures that don't look like the man above. In any case, if that's a wedding ring, it's on the wrong hand or some editorial image flipping was performed.

The article was interesting.

[Mike Johnston]

Speed,
It's him all right. Here's another picture:

http://www.guardian.co.uk/business/2012/feb/05/olympus-shareholders-quiz-board-members

Mike

[Clayton Jones]

Mike,
Thanks for posting this link. I liked the article because it gave some historical perspective as well as details of what happened. Very informative.

[Bryce Lee]

The article on Woodford was most interesting. Japan, as with ALL countries has its share of crooks and schemers. Problem is our society as a whole has discovered the world is so similar to Olympus that cooking the books has become the norm. For every corporation big or small.
It's the sign of the times.
There's power and then there is absolute
unquestionable power, over everything.
That's what we have here...

[Miserere]

This will have to become a movie. I suggest Kevin Spacey to play Woodford.

[Bruno Masset]

Olympus' treasury department did some bad "investments" in the eighties, linked to currency derivatives.

The eighties were a time when the yen rose highly against the dollar, wiping out the operating profits of many Japanese companies.

Olympus' naive, optimistic or incompetent treasury & finance guys were probably easy prey for the investment banks who sell complex structured products.

Olympus, who was presumably, like many Japanese companies of that time, hoping to hedge the dwindling exports and mounting losses caused by the rise of the JPY, instead found itself killed by the volatility triggers in its derivative contracts, and lost more than a billion USD.

The magnitude of the loss probably frightened Olympus' executives, who probably estimated that publishing that figure would have a high probability of killing the company, as spooked banks shut down Olympus' credit lines and deprived them of vital operating capital.

Accounting rules back in these times allowed financial instruments to be carried at acquisition cost, which enabled Olympus to hide these losses for years.

Olympus' plan was probably to "launder" these hidden losses by diverting part of its yearly cashflows to progressively reimburse these debts. The method chosen was to acquire overvalued companies, then write off the overvalued part, thus causing "clean", presentable losses.

After a few years of that game, the hidden losses would all have been reimbursed, and both the public and the hidden financial situation would have been brought in agreement.

But when "mark to market" accounting rules became mandatory, concealing losses presumably became more and more difficult.

Which is probably why they needed to accelerate the writeoff and reimbursement game, and started pouring hundreds of millions into bizarre acquisitions so that they could quickly generate "clean" writeoffs and thus "launder" their remaining hidden losses.

It seems Woodford was made CEO after most of the hidden losses had been reimbursed to the creditors, and the Japanese executives thought that they were becoming a normal company again.

Unfortunately for them, Woodford, alerted by a magazine article, started to dig into past financial transactions.
When Woodford discovered that these acquisitions were systematically overvalued and the cash diverted to obscure destinations, and couldn't get any meaningful explanation from the embarassed Japanese executives, he assumed the worst.

Excerpting from Olympus' own investigation report, quoted in the Businessweek article:

"The massive overpayment for assets and lavish fees, totaling at least $1.6 billion, were, in other words, a fraudulent attempt to cover up previous bad investments by a series of Olympus presidents, dating to the bubble economy of the 1980s.
[..]
the core of [Olympus] management was rotten and those around them were also contaminated. … Shifting losses off the books and trying to cover them up over a long period of time is the behavior of those who do not understand compliance.”

For anybody who knows anything about the accounting of financial instruments in the US, this should be reminiscent of FAS 157d: in the aftermath of the financial crisis, financial institutions were allowed to mark their illiquid financial instruments not to the market price, but to what they estimated the security was worth based e.g. on their mathematical models (the derisively-called "mark to model" approach)

This, in substance, isn't that different from concealing the so-called "true" or "market" value of a portfolio of toxic financial assets, i.e. "attempt to cover up their previous bad investments", but is fully legal in the US.

Furthermore, the Fed, who purchased, either outright or as REPOs, massive quantities of these toxic assets from the banks, is, in some sense, helping the US banks to "shift their losses off their books and cover them up for a long period of time." This, also, is fully legal in the US, and even has the Federal government's blessing.

And unlike many big US banks who suffered major losses, and convinced their counterparties to "voluntarily" write off and take a haircut on the value of their claims, it seems Olympus didn't get any injection of capital from the government, but clenched their teeth and used their own cashflow to progressively repay the money they owed to their counterparties after their disastrous dabbling in derivatives in the eighties.

Olympus has been called the epitome of "corporate malfeasance" and its executives have now been arrested; yet, I don't see many arrests taking place in the centers of finance across the world, or on Wall Street in particular…

Amusing.