Former Nomura CEO and Zen Practitioner Has Lots to Contemplate

With his bid to make Nomura a global player going nowhere, Kenichi Watanabe was undone by an insider trading scandal.


Every Saturday evening — and possibly even on weekdays in the coming months — Nomura Securities’ former chief executive officer Kenichi Watanabe will be leaving his Tokyo home and heading to a Buddhist temple in the hills outside the city where he practices zazen, or Zen Buddhist meditation.

The lifelong Buddhist meditation practitioner certainly will have a lot to contemplate and reflect on. Only three years ago, he led Nomura in one of the boldest moves in the 87-year history of the Japanese investment bank with the acquisition of the European and Asian operations of bankrupt Lehman Brothers Holdings.

The price was modest — $225 million for the Asian business and a token $2 for the European unit — though Watanabe made a commitment to pay $1.5 billion in bonuses to some 8,000 former Lehman employees to keep them on board. That deal, which Watanabe described in an interview with Institutional Investor in mid-2009 as a “once in a generation opportunity,” turned out to be his undoing. By 2011, markets had turned against him and he was forced to launch a $1.2 billion cost-cutting drive, mainly targeting the ailing European operations, which were hurt by the EU sovereign debt crisis.

On July 26 Watanabe and his deputy — chief operating officer Takumi Shibata — both resigned, taking responsibility for an insider trading scandal that they personally had little to do with.

Japanese regulators are investigating staff from Nomura’s institutional sales team for allegedly leaking information on three Japanese share issues to clients in 2010. The bank has been caught up in a wider crackdown on tip-offs ahead of share offerings in Japan that has implicated several other brokers and fund management firms.


But insiders at Nomura say that if the Lehman acquisition had not gone sour, it is highly likely that Watanabe and Shibata would have survived the insider trading probe. In fact, they also say the resignation of both does bring an end to Nomura’s quest to become a truly global Japanese bank. Some former Lehman and Nomura staff say Watanabe and Shibata are at least partly responsible for the failure of the Lehman acquisition in so far as it was poorly integrated.

“One could see a growing unwillingness of senior executives at Nomura — for one reason or another — to take the reins and actively manage the business,” says Paul Schulte, BNY Mellon Asset Management’s Hong Kong–based investment strategist, who was Lehman’s Asia equity strategist at the time of Nomura’s takeover. “So anyone who stepped up to the plate — whether they were qualified or not — was allowed to move in. This created an atmosphere of ‘each man for himself.’”

At the press conference announcing his promotion from president, newly appointed Group CEO Koji Nagai said he would not dismantle the global franchise but would carry out a review to find the “appropriate size” for the bank, as well as refocus on home markets such as Asia and Japan.

But implicit in that language is a sharp shift in direction, says Schulte, who joined Nomura and worked for about six months before leaving. “There will be greater focus on Japan,” he says. “Ironically, there will be great businesses for sale for pennies on the dollar in the next three years. Perhaps Nomura was just early.”

The market clearly has punished Nomura in the past three years, driving the stock price from about 1,300 yen per share when it bought Lehman’s assets to about 300 yen per share today.

To be sure, few foresaw the unraveling of a European sovereign debt crisis in 2008 when the Lehman takeover occurred. Watanabe intended to transform Nomura — a powerhouse in Japan but a perennial weakling in foreign markets — into a titan to rival the likes of Goldman, Sachs & Co., JPMorgan Chase & Co. and Deutsche Bank around the world.

“My vision is to create an Asia-based global investment bank that is within the ranks of the global top five,” a broadly smiling Watanabe told Institutional Investor during the interview in the 12th-floor boardroom of Nomura’s headquarters in Tokyo’s Otemachi financial district. “I have no doubt I will succeed.”

As it turned out, Watanabe had no more success than his predecessors did at growing the business outside its home country. Over the years the firm has tried several times, unsuccessfully, to parlay its dominance in Japan’s securities markets into global leadership, without success. Nomura built a top-five position in the Eurobond market in the 1980s by underwriting equity-linked bonds, only to retreat after Tokyo’s stock market bubble burst after 1989. More recently, Nomura expanded aggressively into the U.S. mortgage market but pulled out with big losses after the subprime crisis erupted; the firm took ¥126 billion ($1.6 billion) in subprime write-downs in the financial year ended March 31, 2008, prompting a shakeup that elevated Watanabe to the CEO post in April 2008 in place of Nobuyuki Koga, who was sidelined to become chairman of Nomura Holdings.

According to various sources, Koga moved behind the scenes to force Watanabe to step down, relegating him to the role of group “adviser.”

Watanabe, however, was right in believing Nomura has no choice but to go international and reduce its reliance on the slow-growth Japanese economy if it wants to thrive. He summed up his approach with the motto, “Create change, be world-class and act with speed.”

In some respects, however, Watanabe was an unlikely change agent. He joined Nomura as a trainee in 1975 after getting a B.A. in economics from Kobe University. He distinguished himself in the 1980s as a senior executive in domestic retail sales, the core of the firm, and won promotion to general manager of international planning and administration. He never served overseas, though.

Still, he was far from insular, repeatedly seeking to shake up the status quo. After being promoted to the board of Nomura Securities Co., the group’s main operating arm, in 1998, he successfully pushed to split off asset management into a separate unit and list Nomura’s shares on the New York Stock Exchange. Later, as head of domestic retail and deputy president of Nomura Securities, Watanabe was the driver behind Nomura’s $1.2 billion acquisition of Instinet, a New York–based agency brokerage whose Chi-X unit operates leading alternative exchanges in the U.S., Europe and Asia.

Shortly after taking over as CEO, Watanabe gathered the firm’s top executives at a picturesque Karuizawa resort in the mountains of Nagano prefecture in August 2008, a month before Lehman’s collapse. He told his team that Nomura needed to move aggressively to bring in international talent and that the best way to do that was through an acquisition rather than an organic approach. “When we were presented with the Lehman opportunity, we immediately knew that it would give us an opportunity to create change as well as change ourselves,” he told II in 2009.

Now Watanabe has ample opportunity to reflect on what went wrong.