Daiwa offers a warning against complacency


Whoops! Here we go again. The long shadow of Nick Leeson and the Baring's collapse has barely lifted, and already the international banking establishment is having to come to terms with another billion dollar plus loss carefully notched up in unauthorised trading under the noses of management and supervisers.

This time it is the turn of the Japanese, making it a full house of banks in the world's major financial centres to have been hit by massive trading scandals. Before Baring's downfall - which, although it occurred in Singapore was as much about gross negligence and failures in London - there was the humiliation and demise of Kidder Peabody in New York at the hands of a fraudulent bond trader.

Now one of Japan's eminent city banks, Daiwa, is bowing and scraping the ground, apologising for "causing trouble" to clients. In the old days there would have been blood on the carpet; now the chairman and president take a 30 per cent salary cut and promise to do better.

Daiwa, based in Osaka and one of Japan's big commercial banks, is not to be confused with Daiwa Securities, one of the world's leading securities trading houses. Nonetheless as the 41st biggest bank in the world with group assets of around pounds 125bn, Daiwa is no financial innocent, and unlike most Japanese commercial banks it does have securities experience.

This makes it all the more amazing that Toshihide Iguchi, who, far from being a Nick Leeson was a senior executive (the head of bond trading in an important office in the world's most sophisticated financial centre, New York), was able to carry out more than 30,000 unauthorised trades, totalling $1.1bn of losses, over 11 years.

At the time of Baring's, much was made of the extraordinary unworldliness and incompetence rife among the British merchant bank's senior management, allowing Mr Leeson to get away with what in reality were pretty unsophisticated tricks of the trade. Other banks were quick to stress that their own failsafe risk control systems would never permit such foolishness. Baring's was a one-off, a grotesque exception.

Daiwa comes as a timely warning against such complacency. How many other institutions out there are handling other peoples' money with rickety controls and a lax, trusting management, watched over by somnolent supervisors? The 44 year-old Mr Iguchi was not bamboozling his superiors with wizard derivatives, but was trading in bog-standard US government bonds. Shades of Baring's, he too appears to have had one hand on the trading phone and the other helping fill out the settlement slips.

It appears there are still some very basic, and vital, lessons to be learned about the determined rotten apple. Every organisation has them; some, however, are clearly better than others at throwing them out before they do damage. As for why a Japanese bank should fall victim to such primitive fraud, look no further than their horrendous bad debt position to find the answer.

New chapter begins for book industry

The death knell of the Net Book Agreement was sounded loud and clear yesterday, and it didn't take regulatory action, government disapproval or even a directive from the European Commission to make it happen. The departure of three major publishers, HarperCollins, Random House and Pearson, added to the handful already operating outside the agreement (notably Reed), make the agreement unsustainable. The market has spoken.

The fact that the last remaining legal price-fixing agreement managed to cling on so long is testimony to two key facts about books that do not apply to other industries. First books, unlike many products, are supposed to be educational; to have as full a range of them available in every shop was thought to be "a good thing". Second, books operate on the basis of a peculiar economics. Booksellers can buy as many books as they like and send them back to the publishers as "returns" for full credit. Like all price-fixing, however, this led to distortion of the normal market signals. It was never clear whether demand and supply were in sync, and whether the prices truly reflected operational and marketing skills. Without the NBA, good marketing and creative management will be rewarded. Good publishers will flourish; so will good book retailers. The quid pro quo is commercially unaccomplished ones will go to the wall.

Tempter stands at Ken Clarke's shoulder

The Chancellor was not short of budget advice yesterday from business leaders and the interests they represent. The Institute of Directors wants relief for small businesses through abolition of capital gains and inheritance taxes, the British Retail Consortium wants relief for consumers, through lower personal income taxation and the abolition of stamp duty. It doesn't take much thought to realise which is the more attractive advice politically.

As Ruth Lea, the head of the policy unit at the IoD, confessed in a moment of candour, the institute's representations are pretty unlikely to be followed by Kenneth Clarke. Political imperatives make a down- payment on income tax cuts essential, both to restore the Tories' claim to be a tax-cutting party but also to put New Labour on the line. To that extent, the retailers with their call for lower personal taxation are more likely to have the Chancellor's ear, despite the well-known fondness of Number 10 for measures to promote John Major's romantic vision of wealth cascading down the generations.

The political imperative will also be to present tax cuts as responsible, matched pound for pound by spending reductions. Hence the clarion call by William Waldegrave, the chief secretary, for cuts. What is certain, however, on past history, is that the axe will fall most heavily on investment projects. No wonder Adair Turner, in his first speech since taking over as director-general of the Confederation of British Industry, stressed the need not to sacrifice public investment in the transport infrastructure.

The big temptation for the Chancellor will be to eat his words and steal the Opposition's clothes by exacting a windfall tax on the electricity and water companies. The groundswell of support on the Tory backbenches for a levy continues to grow, fuelled by the intense unpopularity of the utilities. A windfall levy would go down a treat with Conservative supporters seething at the ineptitude of the water companies in the drought and the excesses of directors' among the utilities.

Whether or not the Chancellor succumbs to the tempter at his shoulder, the proposed windfall levy highlights the potential for a switch in taxation from people to companies - one that could well lead to politically arresting income tax cuts while allowing Mr Clarke to claim that he has been responsible with the public finances. It may be too much to resist.

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