JAPAN-FINANCE: Daiwa Scandal Leads to Questions on Bank Oversight

By Farhan Haq Reprint | | Print |

NEW YORK, Sep 28 1995 (IPS) - The sudden reported loss this week of one billion dollars from Japan’s Daiwa Bank has sparked new fears that the world banking system lacks accountability.

Bank officials in New York were stunned at the news that one of their colleagues, Toshihide Iguchi — a senior Daiwa manager in New York — had run up losses of 1.1 billion dollars in illegal transactions over the past 11 years.

Daiwa officials and other banking experts conceded shock that one person in a position of responsibility could lose so much and remain unchecked.

“We are deeply embarrassed that our internal controls and procedures were not sufficient to prevent this fraudulent action,” Masuhiro Tsudo, general manager of Daiwa’s New York branch, said in a statement.

Japan’s Finance Ministry reacted to the scandal by calling for a temporary institution, similar to the U.S. Resolution Trust Corporation, to take over failed thrifts. It also has proposed using funds from taxes to finance losses from failed banks and to shore up banks in danger of failing.

But some banking experts doubt that Iguchi’s case will prompt an examination into the largely unchecked world of financial trading, any more than did British trader Nick Leeson’s loss of 1.4 billion dollars for Barings Bank, reported last year.

“What happens is that managements don’t ask any questions as long as things seem to be alright,” Doug Henwood, editor of the New York-based Left Business Observer, said. “As long as the trading desk is working well, they don’t watch.”

Daiwa conceded as much in a news conference in its Osaka headquarters Tuesday, a day after the bank dismissed Iguchi.

“We really believed in him,” Daiwa president Akira Fujita told reporters. “He created a system where he was in charge of everything.”

Iguchi joined Daiwa in 1976 after working as a car dealer in the United States and became assistant vice-president seven years later. He reportedly began his illegal trading in U.S. Treasury bonds at the same time. He lost some 200,000 dollars trading those bonds in 1983.

For the next 11 years, according to a letter Iguchi wrote to Fujita in July, the New York-based banker made some 30,000 unauthorised trading deals.

Despite that, Iguchi’s reputation soared as Daiwa’s New York branch reported profits of more than 100 million dollars a year.

Iguchi hid records and forged trading documents to conceal the amount of securities he sold, U.S. officials claimed when they arraigned him for illegal banking practices Tuesday.

If he is found guilty, Iguchi could face as many as 30 years in prison and one million dollars in fines, U.S. attorney Mary Jo White said after his arrest.

How Daiwa will adjust to the loss, the biggest reported by any Japanese financial institution, is another matter entirely. Many bankers here openly doubt that Daiwa could have lost so much money off of one trader’s U.S. Treasury bond dealings — nearly 400,000 dollars in losses every single trading day for 11 years.

“I find it hard to believe that ‘plain vanilla’ transactions such as these were allowed to accumulate for so long,” Larry Duke, vice-president of Citibank, told The Guardian in Britain Wednesday.

Moreover, the two-month delay between when Iguchi informed his superiors about the losses and when Daiwa told regulators here about them itself apparently violates U.S. and New York state banking laws. But the Federal reserve refuses to comment on the Daiwa case or any further penalties for other Daiwa bankers.

U.S. attorney White said the Federal Bureau of Investigation (FBI) will still investigate the affair. She said other bankers may also be named.

But Henwood doubted U.S. regulators will drop the cautious approach they have adopted in dealing with traders. In general, he said, “they don’t want to rein in these guys yet.”

Although the regulators have gone after a few rogue U.S. traders in the past decade, including Andrew Krieger, former chief trader at Bankers’ Trust, U.S. authorities are satisfied that banks here are in good enough shape to capitalise on any losses, Henwood argued.

“The U.S. banking system looks in as good shape as it’s ever been,” he said. Japan, on the other hand, has been suffering, racking up some 400 billion dollars’ worth of bad debts since the real estate markets crashed in the late 1980s.

The effect of the losses at Daiwa — Japan’s 10th largest bank and 19th largest worldwide — may hurt the nation’s fortunes even further.

Daiwa president Fujita said that he and the bank’s chairman would take 30 percent pay cuts for the next six months, and that other bank directors would have salary cuts of between 10 and 30 percent. But, as Henwood noted, “That’s not going to come out to a billion dollars.”