ALJ claimed to have 209 billion yen in net assets as of March 2011 , while in reality having just 25 billion yen worth of net assets. Currently AIJ has only 8.1 billion in their cash accounts ! So for their 94 clients including 92 private corporate pension funds , how big of a hole has just materialized ?
Now that financial regulators have raided AIJ Investment Advisors Co. and revoked its registry, the focus will turn to whatever details emerge from the investigation and who is to blame for the fiasco.
The Financial Services Agency said Friday that the troubled asset management firm lied about its net assets for corporate pension funds, saying it had ¥209 billion as of March 2011. In reality, the figure was a paltry ¥25 billion.
AIJ lost a total of ¥109 billion through derivative trades over the past 10 financial years and currently has only ¥8.1 billion in cash accounts, the financial watchdog said.
Member companies of corporate pension funds, which entrusted their money to AIJ, are reportedly preparing for collective legal action.
Questions are now being asked about whether the FSA and the welfare ministry, which supervise public corporate pension funds, will be held responsible.
"The agency will sincerely accept any criticism and make efforts not to let it happen again," financial services minister Shozaburo Jimi said Friday when asked by reporters whether the FSA is responsible for the trouble at AIJ. Declining to give a direct answer about who will be held responsible, Jimi would only say the FSA should first find out exactly what happened.
Some experts point out that one of the reasons the case developed into such a huge debacle was a lack of scrutiny by regulators.
Unlike banks and securities firms, asset management firms are not subject to legally mandated inspections, even though such firms surged in number following deregulation in 2007. They only have to register with authorities to start up their business. Before 2007, asset management firms were required to win the approval of financial regulators prior to beginning operations.
In the past year, only 10 asset management firms out of 265 were inspected, a regulatory source said.
Because of the AIJ scandal, the FSA ordered all 265 to submit reports on their operations by March 14. As of Friday, the agency said it was still checking the reports.
AIJ, led by Kazuhiko Asakawa, a former manager at Nomura Holdings Inc., attracted pension funds by promising high returns. The firm reportedly vowed a 241 percent return on one fund invested in Nikkei 225 options.
The Securities and Exchange Surveillance Commission, which has inspected AIJ, said the firm had 94 clients as of December, including 92 private corporate pension funds.
The SESC will use the material confiscated in Friday's raid to search out more details about the firm's investments; what has been revealed so far is based on documents voluntarily submitted by AIJ.
The fiasco may also have been due to systematic problems in the country's corporate pension funds that the welfare ministry may face blame for.
Private corporate pension funds are required to manage part of public corporate pension funds to boost investment efficiency. But many private and public funds have fallen into deficit, a woe the Lehman-shock downturn only worsened.
The Health, Labor and Welfare Ministry said Friday that as many as 212 private corporate pension funds, 37 percent of all 578 pension funds in Japan, are running in the red. A total of 502 funds promise 5.5 percent annual return, but the average return stands at 1.2 percent, it said.
Some experts say a possible solution in the AIJ case would be a bailout to help reduce the firm's deficits. But the government has said it has no plans to use taxpayer money for such a rescue.
In addition, the welfare ministry revealed Friday that 49 retired bureaucrats gained top positions in 47 private corporate pension funds that entrusted money with AIJ.
Of the ex-bureaucrats, 46 came from either the welfare ministry or the Social Insurance Agency, the precursor of the Japan Pension Service.
Some analysts point out that the former bureaucrats who lack investment expertise may be partially responsible for the funds' huge deficits.
Experts on corporate failures said if worst comes to worst, companies with corporate pension funds that are deep in the red because of AIJ's losses could go under.
"It is very possible that companies will collapse in a chain reaction, and there has been such a case in the past," said Takuya Ishida, in charge of surveying domestic bankruptcies at credit research agency Teikoku Databank.
Indeed, some small companies have gone under after their corporate pension funds were dissolved due to losses.
In 2006, a taxi industry pension fund in Hyogo Prefecture dissolved itself and triggered the collapse of 14 member firms in the following six years. In the event of a dissolution, member companies are required to return part of the public pension funds they handle and offset the deficits as well.
"If one goes under, it could trigger the collapse of one after another, so we are looking very cautiously (for any signs)," Ishida said.