Wednesday, July 11, 2012

Shoot the Messenger: Japan Authorities Targets Insider Trading

When markets don’t go in the way the politicians want them to, the intuitive reaction for politicians has been to shoot the messenger.

From the Bloomberg,

Japan’s crackdown on insider trading barely scratches the surface of a practice that allows traders to profit and brokerages to boost their underwriting business at the expense of shareholders and issuers.

The disclosures have undermined confidence in the world’s second-largest stock market, where the Nikkei 225 Stock Average (NKY) remains 77 percent below its 1989 peak and scandals such as the accounting fraud at Olympus Corp. and covered-up losses at AIJ Investment Advisors Co. deter investors from a waning economy.

In the five insider-trading cases uncovered since March, regulators have proposed fines for traders who short sold shares based on information leaked to them by underwriters before public offerings were announced in 2010. The revelations prompted at least two clients of Nomura Holdings Inc. (8604) to take their business elsewhere after Japan’s biggest brokerage acknowledged the breaches by its sales staff.

“Japan has been letting the animals run wild for two or three years now -- that wouldn’t happen in the U.S.,” said Takao Saga, a professor who studies the financial industry at Waseda University in Tokyo. “Insider trading is still going on in the Japan market.”

With the latest actions, the Securities and Exchange Surveillance Commission and its parent, the Financial Services Agency, are keen to show they are cracking down after it took them nine years to discover AIJ hid losses that reached $1.4 billion on pension money it managed. Olympus admitted to a $1.7 billion, 13-year coverup of losses after former President Michael Woodford blew the whistle last year on inflated fees the camera maker paid for takeovers.

Hindering Fundraising

Authorities are paying attention now because short selling by insiders is hindering corporate fundraising, not just burning investors who aren’t privy to the tips, according to consultant Robert Boxwell. The transactions involve traders selling borrowed shares, betting that the price will fall once the offerings become publicly known on concern over dilution.

“These types of insider trades cost Japan Inc. money,” said Boxwell, 54, who has lived in Japan and now studies global insider trading as director of consulting firm Opera Advisors in Kuala Lumpur. In Japan, “after years of ignoring protests from the West about cleaning up their act, they’re talking tough.”

Never mind if Japanese authorities have stubbornly refused or has procrastinated in adapting the necessary reforms and instead opted to prop up zombie institutions.

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Such failure to reform has not only led to more than three decade slump in the Nikkei 225 (chart from yahoo), but also has put tremendous strains on Japan’s fiscal (debt) conditions.

Nevertheless, Japan’s authorities has joined their western peers to do more of the same thing, of escalating inflationism, which has led to their self perpetuating crisis. The Bank of Japan has even been supporting her stock markets, apparently, to no avail.

Japanese authorities repeatedly failed to comprehend that the root of their problem has not been insider trading but of having too much interventionism or excessive politicization of their markets and their economy

They should heed the prescient admonitions of the great Professor Ludwig von Mises,

The various measures, by which interventionism tries to direct business, cannot achieve the aims its honest advocates are seeking by their application. Interventionist measures lead to conditions which, from the standpoint of those who recommend them, are actually less desirable than those they are designed to alleviate. They create unemployment, depression, monopoly, dis­tress. They may make a few people richer, but they make all others poorer and less satisfied.

Shooting the messenger and witch hunting won’t solve the problem of productivity, competitiveness and fiscal discipline. They are symptoms of the growing desperation of political authorities

To the contrary such repressive measures would only worsen the situation.

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