Mizuho Financial Group’s U.S. subsidiary agreed to pay $127.5 million to settle charges that it misled investors in a debt deal linked to the housing market crisis. Despite such penalties for past misdeeds, the Japanese bank continues to expose its investors to accounting and governance risk.
The Securities and Exchange Commission alleged that Mizuho Securities USA Inc. used fake assets to inflate the credit ratings of a $1.6 billion debt investment backed by high risk mortgage securities in 2007. Mizuho had to give back the $10 million it made in fees on the deal and $2.5 million in interest in addition to its $115 million penalty. The settlement remains subject to court approval, according to a statement by the regulator on Wednesday. Other parties involved in the matter include the former Mizuho employees Alexander Rekeda, Xavier Capdepon, and Gwen Snorteland; the first two agreed to a $125,000 penalty but a decision on that for Snorteland is expected later. All three agreed to be either barred or suspended from the industry for 12 months.
Mizuho Securities U.S.A. did not admit to wrongdoing. In a statement Thursday the bank said it agreed to the settlement to “avoid protracted litigation and distraction,” later adding that it is not under investigation by the S.E.C. for any other deal. Mizuho and its affiliates are “committed to conducting their businesses in strict compliance with all applicable laws and regulations,” the bank said.
Mizuho’s Thursday press release didn’t mention investigations by regulators other than the S.E.C., but as it happens, the Swiss Competition Commission said this March that it’s looking at the interbank lending practices of numerous banks including Mizuho. And the Japanese Bankers Association on Wednesday sent questionnaires to 16 reference banks — including Mizuho — that submit yen-denominated Tokyo interbank offered rates (Tibor) to the association and the 15 lenders that submit euro-yen Tibor rates, Bloomberg reported Thursday.
Mizuho’s management could be more open with its information. For example, the company has opposed shareholder proposals made at its annual meetings, including one in recent months that Mizuho disclose more about its board members’ training. Nicholas Benes, representative director of The Board Director Training Institute of Japan, summed up the board’s response to that idea as “Just trust us, we select good guys… no special training about governance, law or risk management is needed… and despite what you may think, the limited information that we give you (or do not give you) about candidates is sufficient for you to vote in favor of our nominees,” according to a July 10 item on the GMI Ratings blog.
Against such a backdrop, perhaps it is unsurprising that Mizuho appears to account for its finances aggressively. For example, the trailing twelve month average of the bank’s unusual income amounted to $111.872 million as of December 31, 2011, or nearly 9% of non-interest income compared to the industry median of 2%. Mizuho’s unusual income – one-off money that can’t sustain a business long-term – has exceeded the industry median several times in the past couple years. In part due to such red flags, Mizuho’s financial statements reflect an AGR score of 9 as of December 31, 2011, indicating more accounting and governance risk than 91% of companies.
Meanwhile, the company has failed to improve its issues of the past to a satisfactory degree. For example, Japan’s Financial Services Agency in 2002 ordered Mizuho to improve its business system after a system glitch delayed the processing of 2.5 million public-utility payments and other account settlements. Then the earthquake and tsunami hit and Mizuho experienced a rush of donations; the system failed again and left millions unable to withdraw cash, the Wall Street Journal reported. On May 31, 2011, the FSA ordered Mizuho once again to ensure it had adequate business operations, noting issues such as the bank’s failure to develop “an intra-group cooperation and reporting system” as well as continuing problems in its corporate culture.
When a company does not change after reprimands, this raises doubt as to the extent to which it can learn from mistakes such as those made in the financial crisis. In part due to such issues, Mizuho is rated “D” on its corporate governance overall. It seems unlikely that the S.E.C.’s recent fine on its own will prompt Mizuho to behave differently.
Market Cap: JPY 3,222,833.1mm (Large Cap)
ESG Rating: D
AGR: Very Aggressive (9)