Mary Jo White, a US attorney, yesterday said a criminal complaint has been filed against Mr Iguchi, who was fired on Monday and is still in New York, charging him with falsifying the bank's books and records to conceal his enormous losses. Daiwa said the fraud was discovered in July after Mr Iguchi wrote a letter to the president of the bank admitting his activities. He faces a prison term of 30 years and a fine of $1m under the US charges.
Unlike Barings, the British merchant bank that in February was crushed under the weight of the pounds 860m of losses run up by Nick Leeson's hidden derivatives speculation in Singapore, the resources of Daiwa bank have enabled it to take the scandal on the chin. With total assets of pounds 125bn, Daiwa yesterday said it would be writing off the loss, leaving its current profits forecast untouched.
Like Barings, however, the Japanese bank's failure to spot massive unauthorised trading over such a lengthy period of time highlighted the perils of inadequate risk controls and a too-trusting management. The scandal gives added urgency to the deliberations in all major financial centres about what can be done by regulators and banks to improve the effectiveness of supervising traders who often handles millions of pounds a day.The Japanese Ministry of Finance issued a mea culpa yesterday, admitting that two inspections in 1989 and 1994 had failed to spot any irregularities.
Sharing striking similarities with the Leeson case, Mr Iguchi appears to have created a system where he not only traded but had control over the accounting and settlement systems normally used to monitor dealings. "We really believed in him,'' said Akira Fujita, Daiwa's president yesterday. Mr Fujita yesterday apologised to Daiwa's clients for "causing trouble", said he would be taking a 30 per cent salary cut, and that the bank's entire management would have their salaries reduced by between 10 and 30 per cent as well as all bonuses frozen. He said Mr Iguchi had "concealed false transactions, exceeded his trading limits, hid trade confirmation documents and forged statements that enabled him to sell securities without authorisation or detection".
Mr Iguchi had not been trading in complicated financial derivatives, which can be hard to control, but had been Daiwa's main dealer in New York in US government bonds. Daiwa said the fraud was only announced yesterday because it had taken a two-month internal inquiry to get to the bottom of it.
The deception started in 1984 when Mr Iguchi suffered a $200,000 loss, and sought to make good by selling other securities held by the bank, but the losses, and the cover-up, snowballed.
IBCA, the bank credit rating agency yesterday placed Daiwa bank on RatingWatch with negative implications after news of the bond trading scandal broke. Moody's Investors Service, the credit rating agency, said it, too, may cut its financial strength rating of Daiwa. The Governor of the Bank of Japan, Yasuo Matsushita, moved quickly to calm financial nerves, saying "this incident will not cause any concern over Daiwa Bank's financial strength".
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