Godzilla of Finance Makes Quantum Leap
No, Nomura Securities isn’t about to buy a Hollywood studio. But, just like Sony and Matsushita, Japan’s biggest and most powerful financial services firm is behaving as if its future depends on software Made in America.
During the past year, Nomura’s U.S. subsidiary has been swiftly and aggressively hiring some of Wall Street’s most brilliant financial engineers--the Bruce Springsteens and Steven Spielbergs of options, futures and program trading. No Gucci-loafered merchant bankers or M&A; moguls here; these are the bespectacled “quants” who know how to take esoteric mathematical models and custom-build profitable blends of synthetic securities for their clients.
These computational algorithms have become the software machine tools of financial innovation. They literally and figuratively make money. Nomura is betting that its team of American quants can build a new innovation infrastructure for the company’s ambition to become the most profitable financial house in the world. The combination of Nomura’s huge reservoirs of capital and American new product prowess could be explosive.
“We’re at the beginning of a new age of securities,” asserts Robert Mankin, who heads Nomura’s mortgage-backed securities operation. “And we’re going to be a product innovation hub for Nomura.”
The gamble may not pay off. But, pinched between declining margins at home and stiff competition abroad, Nomura’s top management has decided that it has little choice. Unlike a Sony or a Honda, the company has consistently had trouble exporting its domestic success into foreign profits. Nomura has been a bit like the Godzilla of global finance: huge and intimidating but not the most brilliant of corporate creatures. Past strategies to crack the American market seemed more like a portfolio of investments in financial boutiques than a coherent effort to create value.
When the company brought former Kidder, Peabody & Co. head Max Chapman on board to run its American operation last year, it picked someone who had made his reputation by building huge profits via the brains of Kidder’s quants. Chapman understood that even though Nomura was astonishingly wealthy, it would be foolish for the firm to try to compete across the board with the Goldman Sachs, Salomon Bros. and Morgan Stanleys amid a Wall Street depression.
Instead of lashing itself to a “deals” mind-set, Chapman felt that Nomura should create its own financial machine tool software by investing in some of Wall Street’s most lucrative human capital. Not only would Nomura be able to custom-build securities for its longtime corporate clientele like Hitachi, the firm could also re-engineer American financial products so that they could be tasty enough to be marketed through Nomura’s voracious distribution network in Japan.
“The idea is not to reduplicate what Goldman Sachs or Salomon is going to do but to take the raw material and develop derivative financial products out of it that we can ship back to Japan,” says Nomura Senior Vice President John Green.
Green’s group has developed a dollar-denominated real estate product that, as far as the Japanese investor is concerned, behaves just like a certificate of deposit.
“Not many firms can customize a global product for U.S. pension funds, long-term credit banks in Japan, European banks and American corporations--all without prejudice,” says Joseph Schmuckler, Nomura’s 30-year-old senior vice president of equity products, whom Chapman hired away from Kidder. “But that’s what we are going to do.”
Nomura has started from scratch. When Schmuckler arrived nine months ago, “there was a striking absence in what is really a rapidly emerging essential market.” Now his group has 20 people. The company has come from nowhere to seventh in the ranks of firms doing programmed trades. The company’s proprietary trading strategies are making money, Schmuckler says, and is giving the group credibility in the eyes of potential clients in America and Japan.
“I wouldn’t characterize it as a success story yet, but we’re on plan,” Schmuckler says. “It’s not as easy to add value as it once was. People are taking smaller shots at more opportunities rather than bigger shots at single opportunities.”
Of course, all these new technologies and methodologies are direct challenges to Nomura’s status quo. Just as the quants transformed the culture of America’s financial houses like Salomon and Morgan Stanley (not to mention Drexel Burnham), they might ultimately transform how Nomura views its customers and financial markets. Is Nomura prepared to change? Or will the Godzilla be nibbled away?
Although the insanely lucrative days of the 1980s may be gone, financial engineering profit margins can still outstrip Nomura’s traditional sales and distribution margins. What’s more, the technology of finance--like the technology of automobiles and computer chip design--is ultimately global. What Nomura learns in the clash of America’s securities, options, futures and commodities markets can be applied in their emerging counterparts in Asia and Europe.
As in so many domains, American expertise defines and extends the state of the art. But, as in so many domains, Japan’s top corporations recognize this and behave accordingly. In computer hardware technology, Japan was America’s most brilliant student. In entertainment software, Japan is acquiring what its people cannot create. In financial technology, Nomura is acquiring, studying and learning. Nomura believes that these technologies will be engines of growth and profitability for financial services in this next decade.
Nomura is not a Toyota or a Sony--but that’s not for want of ambition. Will Nomura’s American operation simply be an innovation-exporting island? Or will it be the technology gateway that enables Nomura to achieve its global aspirations?
Those are multibillion-dollar questions. If history repeats itself, American and European securities houses will see their growth sacrificed on the altar of Nomura’s quants.
