The scale of the alleged crime is astounding. If proven, the case will represent the biggest financial scandal ever perpetrated on American soil. Inevitably, it is being compared with this year's Barings disaster, where another rogue trader, Nick Leeson, is accused of losing a little more, $1.33bn, and causing the bank to collapse. But while Leeson was engaged in the highly complex business of derivatives dealing, Iguchi apparently did his deed in the more mundane arena of bond trading.
Indeed, as far as we know, the mechanics of Iguchi's alleged swindle were shockingly simple. His sole motive appears to have been to cover up the losses that he incurred because of repeated bad bets on interest- rate movements over an 11-year period from 1984, when he was elevated in Daiwa's New York branch to launch a short-term trading division. If the charges that were laid against him in a Manhattan court last Tuesday are correct, he did it by stealing - very discreetly - over and over again.
To be precise, he stole securities held in the Daiwa's own custodial account at the Bankers Trust of New York. Some were from Daiwa's own portfolio and others belonged to its customers. Then he would simply sell them in the market and use the proceeds to cover what he had lost. The bank's customers themselves were never hurt, because Iguchi was always able to find more money to honour their holdings. Altogether, these illicit trades numbered some 30,000 over the 11 years - an average of 60 a week.
Then, of course, there was the matter of concealing those transactions themselves. Here Iguchi was in the happy position of being in charge at Daiwa not just of front-of-shop trading, but also of the settlements department where all the accounts were balanced.
So he fiddled the books before anyone else got to see them, leaving out all the secret trades and incorporating profits on his bond-dealing activities that were consistently fictitious. The sales slips for each of the securities sales also came to him.
In the meantime, of course, the value of Daiwa's account at Bankers Trust, which is not implicated in the affair, was being gradually eroded. But according to the FBI, concealing that from Daiwa was also barely a problem for Iguchi. The monthly statements from the Trust, showing the correct state of the account, would come first to him. He would dispose of these and with official Bankers Trust stationery he had somehow managed to acquire, he forged new statements showing balances that were wildly inflated.
It was to these statements to which Iguchi directed attention when he wrote a letter of confession to his bosses at Daiwa Bank's headquarters in Osaka, Japan. A statement of the bank's account at Banker's Trust he had submitted showed assets for the year ending 31 July at $4.6bn. Lo and behold, when Daiwa went directly to Bankers Trust to verify the account, the real value of the securities being held was only $3.5bn. It was simply by calculating the difference that the New York authorities charged him with trading away the sum of $1.1bn.
In court last Tuesday, Iguchi offered no plea, and pledged to assist the FBI in its investigations. A first court hearing is scheduled for 10 October. Iguchi's lawyer, Leonard Joy, told reporters that the losses incurred by his client were actually much smaller, in the area of $650m. He meanwhile depicted Iguchi as the victim of a scheme that he began right back in 1984, after making an initial, fairly modest loss of $200,000, and which was spurred only by his need to save face and protect his honour. Once started, however, the lie grew and was soon beyond his control. "It got beyond him", he said. "He didn't get anything from this".
Born and raised in Kobe, close to Osaka, Iguchi never gave the few who knew him the impression of being any kind of buccaneer. He came to the US in the early 1970s and studied pyschology at the relatively obscure Southwest Missouri State University. After graduating, he worked for two years as a salesman in a Mazda car dealership in the midwest before getting a job as a locally-hired employee at Daiwa in New York in 1976.
On a personal level, Iguchi was always seen as a humble man who never drank. He wore cheap suits and rarely socialised with his colleagues. His only discernible passion was golf, and he was a regular star in Daiwa's own in-house championships. Until his arrest late last Saturday by FBI agents, Iguchi, who is divorced, lived with his two teenage sons in a spacious but quite unspectacular home in the comfortable New Jersey suburb of Kinnelon. The house has a Japanese-style pond out front, with large goldfish and a ceramic raccoon sporting a little hat.
Otherwise, few in the neighbourhood seemed to know much about the household. In brief statements, family members expressed astonishment over the allegations. "I don't think there's any way he could do something like that", said one of the sons, Ben Iguchi.
Iguchi was a little better known on Wall Street, if only because of the number of years he had participated in the bond market, buying US Treasury bonds from brokers and selling them on. While not a giant on the street, Iguchi would occasionally move the bond market with purchases of up to $100m a day. Some traders last week said he earned the nickname of "Mr 52", because he had the unusual habit of buying bonds in lots of $52m when most would go for round figures such as $50m or $100m. A few traders confessed that they had wondered about Iguchi and had detected an increasing recklessness in his trading. "Some of us thought he was a bit of a loose cannon," said one.
To his bosses, Iguchi seemed to embody the Japanese work ethic of extreme conscienciousness and long working hours. It was taken as a healthy sign, for example, that Iguchi almost never took more than two or three days' holiday at a time, preferring to stay at his post at the bank. Only now are officials at Daiwa beginning to put a new interpretation on Iguchi's reluctance to be away from the office. Now they believe that he was simply terrified that his creative accounting might have been uncovered in his absence.
Even this small cultural detail of holiday-taking has been seized upon by analysts on Wall Street as they struggle to understand how Iguchi managed to sustain his subterfuge for so long. Many note that in an American financial institution alarm bells would always be sounded by any employee not taking normal amounts of leave. Indeed, under Federal Reserve guidelines for US securities firms, every employee should be obliged to take one break of two consecutive weeks a year, precisely to ensure that somebody else gets to be familiar, if only briefly, with what that person is doing.
Japanese banks may also still put too much stock on old-fashioned trust. "In the Japanese culture, they still believe in trusting individuals and not
asking questions," commented Heinz Binggeli, managing director at Emcor Risk Management Consulting in New York. "I think that is less the case in Europe and certainly does not happen in America any more. If you had asked me two weeks ago if something like this could happen here, I would have said no." Something else helped Iguchi: as a locally- hired employee in New York he was not rotated between responsibilities in the way those sent from Japan were.
In any event, it is evident that whatever internal controls Daiwa had in place were severely lacking. "The bank essentially had no internal control system", remarked William Seidman, former chairman of the Federal Deposit Insurance Corporation. "Very clearly, the lack of internal controls helped him do what he did".
So what about external oversight? Daiwa claims that its New York branch was twice audited by the Bank of Japan during the relevant period, while the Japanese accounting firm of Showa Ota - affiliated with Ernst & Young in the US - was also responsible for scrutinising the New York books. Meanwhile, since regulations on foreign bank supervision were tightened in the US in 1991 after the BCCI scandal, Daiwa in New York has also been subject to annual examinations of its books carried out jointly by the New York State banking department and the New York Federal Reserve. Noting that none of this activity uncovered Iguchi's transactions, Mary Jo White, the New York District Attorney who laid the charges against him said that there was "some evidence that examiners were led astray when they did their examinations".
It may have been action by the Federal Reserve that led Iguchi finally to determine that his number was about to be called. After spotting that he had responsibility for both front-end business and settlements - as Leeson did at Barings in Singapore - it ordered that he be assigned to one or the other but not both. In October 1993, he moved to settlements and gave up trading, although he may still have had some influence on dealing.
As the FBI agents sift through the documents with Iguchi in the corrections room, the scope of the investigation could begin to broaden. It is not yet ruled out that Iguchi may have profited personally from the scheme, nor is it certain that others in the branch were not involved. It is possible, for example, that kickbacks were paid to keep others from talking.
Also hanging over the inquiry is why Daiwa allowed two months to pass after receiving the confession letter from Iguchi before passing on the information to the banking authorities in Japan and New York. In that time, it sold $500m of its own preferred stock, apparently to soften the impact of the $1.1bn loss. Under US guidelines, a bank is obliged to report any discrepancies discovered on its books to the relevant authorities without delay.
Among those sceptical about Daiwa's goodwill and unconvinced that Iguchi could have acted alone is Linda Strom- berg, a banking analyst with MR Beal. "Daiwa would have you believe that Iguchi was a lone wolf who lost his ass trying to save face," she told the New York Post last week. "If that were true, why did it take two months for the senior executives at the bank to call in regulators?
Unlike Barings, Daiwa has ample resources to withstand the loss and even intends writing it off in the first half of this fiscal year - while preserving a profit for the period of some $70m. On Friday, meanwhile, it announced that about 30 of its executives would suffer pay cuts of up to 30 per cent for six months to soften the financial blow and as collective penance for what was allowed to happen. The show of humility may not keep investigators from beating at its door for answers to the riddle of Toshihide Iguchi and his 11-year fiddling spree.Reuse content