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Thursday, 11 July 2013


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And how many American (and UK) bankers have escaped scot free for ruining our pension funds? (Oh, and the world economy....).

""Entirely normal in Japan. First, deny everything. Then, after a periods of outright lies, grudgingly admit (sorta) something maybe happened (perhaps) then 'sincerely' apologize. Then should the gov't. decide to actually prosecute, wait for a year or two then give the 'responsible' executives a suspended sentence."

Entirely (disgustingly) par for the course in current Spanish politics too.

Asco de mundo.

"(I now wait for someone to say it's the same as in the U.S. It is not.)"

Of course it isn't. Here, we don't even bother prosecuting the rascals.

Obviously nobody was planning hari kari.

Predictable doesn't even come close. We, in "The West" mostly live in notional democracies which are, in fact, securely-entrenched oligarchies where real power lies in the hands of a tiny minority who own almost everything. In consequence huge scale crime usually attracts trivial penalties. And only then when the crime becomes too public to conceal any longer and the perpetrators can be sacrificed without collateral damage.

Take a country into an illegal war on behalf of a foreign power by falsifying intelligence data and bamboozling the electorate ? Walk away scot-free and receive huge sums of money and accolades every kind.

Destroy the economies of many sovereign states by speculation, market manipulation and outright fraud? Kindly take a back seat and here's a golden handshake.

Meanwhile the small scale entrepreneurs (who act as if the rationale that the market determines everything is applicable universally) sell a few grams of drugs to willing purchasers, get caught three times and end up serving life without parole.

It's almost funny

"$1.7 billion accounting fraud that caused the Japanese camera maker’s market value to plunge 80 percent."

1.7 billion dollar fraud with 80% loss of company value=suspended sentences. I have to wonder how many people in Japan who steal a car or embezzle a few thousand Yen from their employer are sitting in prison now?

D. Hufford wrote:
> The only time I am aware of that this pattern hasn't occurred was
> when the young maverick Tamafumi Horie of Livedoor failed to
> properly kowtow to the gov't./business/media interests, and
> failed to confess because he did not think he did anything
> criminally wrong

The Livedoor case is, IMHO, only superficially similar to the Olympus case.

Livedoor was a dot-com company with little tangible business, that tried to pad its accounts by reporting as "profit" the money it got from a complex financial construction involving, inter alia, a fund management company owned by Livedoor.

The scheme involved the transfer by Livedoor of Livedoor shares to the fund management company, the selling of these shares by the fund management company, and the accounting by Livedoor of the share sales proceeds flowing into said fund management company as an operating "profit".

A clever idea that was pretty close to pulling money out of thin air.

As the scheme got exposed by Japanese Tax Authorities and Livedoor's profit figures revealed to be little more than fiction, Livedoor got delisted from the Tokyo Stock Exchange. The delisted shares' values plummeted to nearly zero, and the company's individual shareholders of course lost a bundle.

Thus, Livedoor was a company that made little or no operational profit, and tried to improve its looks by padding its accounts.

Olympus is a company with a tangible, profitable business making optical equipment. Olympus' treasury department, however, lost a huge amount of money by getting involved in some disastrous financial derivatives trades.

As I've explained previously, Olympus' management was faced with this choice:

a) They could come clean about the huge loss, and run the very real risk that Olympus goes bankrupt as the banks, freaked out by the suddenness and magnitude of the loss, canceled Olympus' lines of credit, which would make it impossible for Olympus to finance its operating capital and therefore to continue its activities. Needless to say, the financial impact on Olympus' shareholders, should the company have been forced into liquidation, would be severe.

b) They could keep the loss undisclosed, and reimburse little by little their creditors — e.g. investment banks and the counterparties of their disastrous derivative trades — by secretly redirecting part of the cashflow generated by their normal, ongoing business operations. The scheme, if it worked, would allow Olympus to continue to operate as a going concern, and shareholder value would be preserved.

I guess Olympus' management knew that they would be breaking the law by concealing their huge derivative loss, but one could argue that these managers bit the bullet and accepted the quite real personal legal risks such a concealment would entail, while the benefits of such a concealment would accrue principally to Olympus' personnel and its shareholders if the company's liquidation could be avoided.

There's thus, IMHO, a significant difference in the behavior and ethics of Takafumi Horie, Livedoor's founder and alrgest shareholder who tried to grow his company into an Internet powerhouse supported by a huge market capitalization (based on hot air) and Olympus' management who believed that their company could be rescued if only they managed to control the damage caused by a huge one-time financial loss, by surreptitiously spreading its reimbursement over a long period using Olympus' operating cashflow coming from their tangible optical products business.

Let me walk in Atticus Finch's shoes again (I can't help it, I'm a lawyer): those men are not murderers; they're not offenders, and they are not thieves. They didn't do it for themselves: what they did was a rather clumsy attempt to (illegally, for sure) hide the company's losses. They didn't do it for their own benefit, they did it to try to preserve Olympus Corporation's reputation intact. Of course they infringed the law; of course they did the company more damage than they thought; and they acted with malice - but they did what they erroneously thought was the best to protect the corporation; they commited a fraud, and they were punished. Blandly, one may argue, but I'm sure the court applied the law, because no legal system admits 'ex aequo et bono' sentences in cases like this one. I don't know the japanese law, but I believe the judges applied it according to a plausible interpretation; if they didn't, there will always be the chance to appeal.
We tend to claim for high penalties for white collar crimes nowadays, and sometimes we're right. We should, however, keep things into perspective: these Olympus Corporation's administrators didn't kill or offend anyone. They didn't violate the highest values of society: they just hid losses rather clumsily. It was just money, not someone's blood. And let's not forget they were convicted - sentence suspended or otherwise, the court found them guilty and convicted them. Let's respect the verdict.
We must not take vengeance for justice; it looks as if some of us are tolerant towards serious offences and demand for felons like these ones to be lynched. Our moral and ethical values mustn't get out of proportion. They're crooks, but they're not murderers. Money isn't more important than life or physical integrity!
(I rest my case...)

At the risk of beating a thrice-dead horse (sorry, Mike -- if you'd rather not, please feel free to trash this post):

Bruno, I have to say, your take on Olympus management's actions is one of the more heroically positive spins I've ever seen.

I guess my take is more mundane: does it not seem consonant with human nature that they initiated (and their successors continued) a gigantic fraud (which, by the way, they made no attempt to unwind for more than a decade), not out of fiduciary concern for their shareholders, but in order to avoid being irreparably disgraced and then dismissed from the prestigious, well-paid jobs that they continued enjoying for many years after they lost all that money?

And I also wonder what corporate fraud and misdeeds wouldn't qualify for your explanation? Who couldn't cop that plea?: "I did it because I was worried about the welfare of shareholders."

I mostly agree with Manuel.

Our notions of justice have become more than a bit tinged with vengeance, over the years. In the Reagan years and after, public frustration with the inability of law enforcement to reduce endemic crime(that had risen threefold since 1960 in its incidence) led to the widespread tightening of sentencing guidelines.

A hedge fund trader makes insider trades and gets 11 years? Good! Bernie Madoff rips off billions and gets 400 hundred (!) years? Great!!

People have forgotten the grim reality of jail. It is a grim and harsh punishment for two or three years of one's life, never mind 10 or a 100 years. Human life is short and a precious gift, and to whimsically deny someone of decades of it rather than simply a few years over a matter of money is simply unbalanced and the sign of a society that is immature. Fair and proportionate punishment is one thing. Crushing souls over money is quite another.

The Olympus executive should certainly have done some time, maybe a year or so. But they certainly don't owe society any debt beyond that.

Eamon Hickey wrote:
> Bruno, I have to say, your take on Olympus management's actions
> is one of the more heroically positive spins I've ever seen.

Probably because most of the commentary one reads on the Internet about Olympus are made by people completely ignorant about the practicalities of finance and the circumstances of the Olympus "scandal" :-P

As for the motivations of Olympus' management, it would indeed be naive to assume that "avoiding being disgraced and then dismissed from their prestigious, well-paid jobs" wasn't also a concern.

Nonetheless, it's interesting to note that Woodford, unlike his Japanese predecessors, made a more Western, rational decision and decided it wasn't worth the legal risk for him, thus forsaking a "prestigious, well-paid job".

One way to look at this would be that the succession of Japanese managers who participated in the concealment scheme saw more than their own "prestigious, well-paid job" being in the balance; they probably also considered the effect of Olympus' possible bankruptcy on the company's employees. The latter tend, in a Japanese company, to become a sort of extended family and can be a factor in a management's decision to skew from what more detached observers would consider to be the rational path.

One should also mention that "rationality" is in the eye of the beholder.

Is it worth publicizing the actual value of a one-time loss, and thereby risk the bankruptcy and liquidation of a company that is delivering tangible value to society — e.g. Olympus' medical products, — or, instead, keep the loss concealed in an attempt to keep the company alive by softening the blow and spreading the recognition and reimbursement of these losses over a longer period ?

Concealment of losses — a.k.a. "tobashi" — is, from an ethical point of view, a gray area.

a) Such concealment is obviously evil when one parks into off-balance sheet vehicles / special purpose entities the losses arising from a fundamentally unsound and unsustainable business model.
One such example is Enron, who concealed mounting losses as they made it a practice to inflate their apparent income by booking as revenue the entire net present value of risky, multi-year deals, even as many of them subsequently went sour after the first year.

b) Such concealment can be considered acceptable for the greater good, if it protects the financial stability of entities that are deemed to provide value to society.
One such example is banks, which provide (1) the payments infrastucture and (2) the credit flow without which an advanced economy cannot function. However repugnant it may seem to some, it thus makes sense to perform "tobashi" — i.e. park and conceal — the losses caused by the collapse in value of the suddenly unmarketable mortgage-backed securities that most large US banks held in their inventory. As market prices couldn't be determined for such toxic securities that no market participant wouldn't touch anymore, the Federal Reserve stepped in and bought them by the bucket e.g. in REPO operations conducted at unlikely prices, unloading them — at least temporarily — from the US banks and thereby enabling said banks to embellish their balance sheets and regain their vital access to the interbank credit markets.

From a usefulness to society and ethics point of view, methinks Olympus is closer to case b).
Let me also point out that Olympus used their own cashflow to dig themselves out of their hole, and didn't get injections of government / taxpayer money to cover their losses.

How do you compare a burglar that steals a £1000 worth of my (insured) house contents with a trader or executive who (through reckless negligence) destroys thousands of people's savings and pension funds?

If a burglar gets up to five years (in the UK) and life in the US (for a third offence) how come you can let someone off completely for financial crimes?

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