The shock waves that jolted Nomura on January 10 were not so much sparked by the resignation of the Japanese bank's wholesale division CEO Jesse Bhattal, but the news, shortly afterwards, that Tarun Jotwani, a close friend of Bhattal's and a lieutenant being groomed to succeed him, was also out.

Nomura <8604.T> announced it was splitting its fixed income and equity divisions - a year after Bhattal and Jotwani, a fellow Lehman Brothers alumnus had combined them. Jotwani's role as global markets head was eliminated, making him redundant.

Bhattal, 55, was allowed a graceful exit, though several sources familiar with the issue say he was forced to resign. London-based Jotwani, four years his junior, was swiftly erased from the Nomura system. The sources did not wish to be named as they are not authorised to comment publicly on the matter.

The double departure reveals just how quickly Bhattal's relationship with Nomura's senior executives collapsed, and exposes the deep strategic divide that emerged between the ex-Lehman camp and legacy Nomura bankers little more than three years after the Japanese bank bought bankrupt Lehman's Asian and European operations.

Bhattal, the former head of Lehman's Asia operations, was positioning Nomura's wholesale group to focus more on the fixed income market - the area Jotwani knew best.

Like most banks caught in the grip of the market downturn, Nomura sought to pare back its costs. Bhattal wanted those cost cuts to be mainly in the weak performing equities division, specifically research and sales, the sources said.

But the Tokyo headquarters resisted. The ex-Lehman banker was taking aim at the historical heart of Nomura.

To Bhattal and Jotwani, using Nomura's balance sheet to scoop up cheap fixed income assets in crisis-mired Europe and elsewhere would position the bank to ride through the downturn and profit heavily from an eventual up-cycle.

To Nomura's senior inner circle, this was a huge risk and ran counter to it looking to protect its balance sheet at a time when regulators want banks to build up their cash reserves. On top of that, Nomura faces a potential ratings downgrade, making risky investments even less palatable, the sources said.

Yes, the assets are cheap and we would likely sell them later for a profit, said one Nomura insider, who requested anonymity as he was not authorised to discuss the matter publicly. But the balance sheet would have been encumbered.


Among senior Nomura executives, confidence in Bhattal, which had been fading by last summer, evaporated after September when more details of his cost cutting plan and strategy emerged.

That waning support was fuelled in part by the wholesale division's poor performance - it lost $1 billion (642 million pounds) in July-September. When Nomura reported that number on November 1, it also said it would treble the scope of a restructuring plan announced earlier in the year, seeking $1.2 billion in cost cuts.

Bhattal wanted to streamline operations and focus less on growing the bank overseas, but group CEO Kenichi Watanabe and others feared this would send investors the wrong message as Nomura had trumpeted its Lehman buy as its ticket to become a global bank.

The departure of Bhattal, the first foreigner to sit on Nomura's executive committee and a key link to the Lehman legacy, and that of Jotwani, a graduate of Delhi University, underscores Nomura's struggle in trying to scale up to a world class investment bank from its roots as a Japan-focused brokerage.

The high-profile exits, the risk of a credit rating downgrade after quarterly results due on February 1, and a share price that has slumped 90 percent in 5 years, have prompted the wider question of where Nomura is heading.


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A main cost target of Bhattal's plan was Nomura's equities research and sales unit. Another was the U.S. operation, which Bhattal felt had little chance of making a big impact in the market despite its expansion to more than 2,000 staff.

In 2008, Nomura passed up the chance to buy all of Lehman, including its vast U.S. operations, mainly because of the associated legal and balance sheet risks.

Without a broad and established U.S. platform, critics have said Nomura lacks a key piece for its global footprint puzzle.

Nomura has repeatedly expressed confidence in its strategy for the United States, where it's seeking to establish a consistently profitable operation, but not chase the scale of the biggest banks. The U.S. business, which was profitable in the year to March 2011, was loss-making in the first-half of the current fiscal year.

Spurred in part by the threat of a Moody's downgrade, Nomura moved swiftly late last year to reduce its exposure to volatile debt markets in Europe, which had already seen off MF Global. In November, Moody's put Nomura's Baa2 debt rating under review, citing the wholesale division's deep losses and the bank's inability to capitalize on the Lehman franchise.

A one-notch downgrade, while seen as manageable, would force Nomura to put up more collateral and could prompt some counter-parties to reconsider trading with the bank. A 2-notch cut, seen as very unlikely, would put it in 'junk' territory and deal the bank a heavy blow, analysts have said.

Moody's is expected to announce a move next month, after Nomura's quarterly results.

While Nomura says it has no plans to abort its mission to build a more global business, the Bhattal/Jotwani exit and the rift over strategy come just as the pressure mounts on the bank to conjure up a quick turnaround.


Bhattal, born in India's Punjab province, was an excellent athlete and accomplished squash player who became a Rhoades Scholar and settled into the New York investment banking scene, working for Merrill Lynch before moving to Lehman.

He was a hands-on leader, very different to the traditional title and chain of command conscious Japanese manager.

One Lehman anecdote has it that Bhattal, then Asia CEO, called a Hong Kong trader directly and asked to walk him through a trade that had just failed. The trader, suspecting a prank as CEOs were not known to call the floor directly, muttered an expletive into the phone and hung up. Bhattal was said to be more amused than annoyed.

How much Bhattal exercised that hands-on approach at Nomura, and how much he is responsible for the wholesale division's 73 billion yen ($950 million) second-quarter loss is up for debate.

Sources close to Bhattal point out that he only took over as CEO of the division in April, so it would be unfair to pin the loss squarely on him, though he had been president since April 2010. The sources, who wished not to be identified given the sensitivity of the issue, say Bhattal felt senior Nomura executives did not give him the freedom to run the division on his own. He remained a key link for the ex-Lehman hires and for former Lehman clients. Bhattal had been expected to step down in the spring.

Other bank sources, who also did not want to be named as they are not authorised to talk to the media, say he had effectively been in control since becoming president of the business more than a year earlier and that as the losses piled up, the scrutiny from Tokyo heightened.

The tension between Bhattal and senior Nomura executives grew late into last year, with the exception of Takumi Shibata, a veteran Nomura banker who, with Bhattal, negotiated Nomura's purchase of the Lehman businesses. The two remain close friends.

When Watanabe had doubts or frustrations about Bhattal, Shibata would step in and ease the strain. But his go-between skills were being tested after September.

Late in December, Watanabe and Bhattal met in Tokyo. What they discussed is not public, though some of the people spoken to for this article say that is when either Watanabe asked Bhattal to step down, or Bhattal signaled his intention to resign.

The press release published on Nomura's website announcing Bhattal's resignation was fulsome in its praise for the banker, including a glowing quote from Shibata. What it didn't convey is the level of frustration over the direction of the wholesale division.

Nomura declined to comment for this article.

After an initial $400 million cost cutting plan across wholesale that began in July, Bhattal pushed for deeper cuts, and met resistance on where the axe should fall.

With relations souring between Bhattal and top Nomura executives, an article about an additional $1 billion in planned cuts at Nomura appeared in the Wall Street Journal in late October, citing anonymous sources.

In the original online version, editor notes left on the bottom of the article seemed to point to Bhattal as the source of the information. The Wall Street Journal quickly took down the version, though officials inside Nomura were alerted.

On October 26, a Financial Times correspondent posted on Twitter, Urgent: Read it while you can - the WSJ has left in their sourcing on this Nomura 'hit,' and provided the link to the online story.

It was very damaging, said the Nomura insider who was quoted earlier in this article.

With the cost-cut debate leaked, Nomura officials felt they needed to sign off and support Bhattal. But, when he outlined where he wanted the additional cuts to be, and his fixed income strategy, Tokyo lost faith.

Not only would the cuts strike at Nomura's core - equities - but the fixed income focus was too risky.

Bhattal's fate was sealed, and an early exit scripted.

(Additional reporting by Emi Emoto and Nathan Layne in TOKYO; Editing by Ian Geoghegan)