A BLOWN BILLION

7 minute read
John Greenwald

For 11 years before FBI agents nabbed him, Toshihide Iguchi lived the well-ordered life of a Wall Street workaholic in Kinnelon, New Jersey. He rose early and headed to Daiwa Bank’s Manhattan office, where he was the trusted head of U.S.-government-bond trading. He took few vacations–and then only several days at a time before rushing back to the office.

He had good reason to keep his head down, according to charges brought last week by the U.S. Attorney’s office in Manhattan. During those 11 years, the office said, the baby-faced Iguchi made an astronomical 30,000 unauthorized transactions while trying to cover up losses that ultimately ballooned to $1.1 billion. His method was simple: whenever he lost money as a government-bond trader, Iguchi allegedly plucked and sold bonds from Daiwa’s own accounts or those of its customers, and then forged documents to make the trades look like authorized transactions. He seemingly sought no gain for himself other than to conceal his losses.

The spectacular allegations put Iguchi in the company of a rogues’ gallery of high rollers accused of vast secret transactions that have rocked their firms in the 1990s, spurring some companies to tighten oversight of trading desks. Iguchi’s closest kin in scandal is Nicholas Leeson, the Singapore-based derivatives trader who racked up $1.4 billion in hidden losses that broke Britain’s Barings Bank when they came to light last February. Like Leeson, Iguchi was simultaneously in charge of making trades and recording them in his firm’s back office–a combination that enabled him to conceal the true nature of the transactions. But unlike Leeson, who has remained in a German jail while Singapore continues its effort to extradite him, Iguchi traded nothing more exotic than U.S. Treasury securities. They are “as plain-vanilla a financial instrument as you can find,” notes Marc Cohen, managing director at the Hermes Capital hedge-fund firm. That very simplicity should have made the fraud relatively easy to spot.

While intensely embarrassing, the hidden deals won’t shatter Daiwa, the world’s 13th largest bank (Barings ranked 474th). Its $197 billion in assets can easily absorb Iguchi’s losses. Even after writing them off, Daiwa expects to report a $70 million profit for the six months that ended on Sept. 30. Yet Daiwa’s 30 or so top officers, in a form of self-imposed wrist slaps, will take pay cuts of up to 30% for six months and will forgo their annual bonuses. The bank itself sold $336 million worth of real estate in Tokyo, Osaka, Hiroshima and other cities last week to help offset the losses. The situation at Daiwa could hinder Japan’s attempts to clean up its banking mess.

The gigantic scope of Iguchi’s fraud, and the bank’s seemingly lackadaisical response even after it surfaced, raised questions on Wall Street about whether the 44-year-old trader–whose nicknames were “Tosh” and “Toshy”–had acted alone or with the help of friends in high places at the bank. It was noted that nearly two months passed between the time Iguchi blew the whistle on himself in a July 13 letter to bank president Akira Fujita and the time Daiwa informed authorities on Sept. 18–despite the fact that U.S. state and federal regulations require banks to give immediate notification of criminal behavior. And although Daiwa relieved Iguchi of his responsibilities in July, it did not get around to firing him until Sept. 26–two days after the FBI went to his home to arrest him.

While Daiwa said it needed time to ascertain facts before informing the authorities, some Wall Street experts said the delay looked suspicious and improper. “That is not acceptable behavior in our view,” says Heinz Binggeli, managing director of Emcor Risk Management, a consulting firm. “You don’t let two months pass before you shut down the operation.” Says the chief government-bond trader for a large Wall Street firm: “This went on undetected for 11 years? Come on, who’s kidding whom? It’s a joke.”

In Tokyo the scandal threatened to complicate efforts to ease the three-year banking crisis and rescue eight housing lenders that are wobbling beneath $84 billion of bad real estate loans. Just last week a government report urged the use of taxpayer funds to bail out the banking system. That outraged critics like Hatsuko Yoshioka, the head of Japan’s powerful Housewives’ Association, an umbrella organization of 391 women’s civic groups. Yoshioka wants major banks like Daiwa to commit some of their vast resources to shoring up ailing banks and housing lenders. Says she: “Daiwa Bank, although it lost $1.1 billion, is still going to be in the black this year. Why is that? Even when banks have big problems, they can still have profits.”

Iguchi, who could face up to 30 years in prison and a $1 million fine if convicted of bank fraud and forgery, remained a mystery to his neighbors and colleagues as he languished in a Manhattan jail cell. He is divorced but has custody of his two teenage sons. The threesome moved from one neighborhood to another in 1991, finally settling into a house currently worth about $300,000. “I’ve never seen him, and we live right across the street,” says Karen Donow of Kinnelon. “I’ve seen the kids playing basketball, but that’s it. No one knew him. He just came and went.”

Iguchi, who is now an American citizen, shed his Japanese roots early on. A native of Kobe, he graduated from high school in 1969 and swiftly lit out for the territory, which in this case meant Southwest Missouri State University, in Springfield. Iguchi, one of 54 foreigners in a student body of more than 12,000, majored in psychology and became a cheerleader before graduating in 1975. “He was a little shy,” recalls retired mathematics professor Howard Matthews, who advised foreign students at the school. Matthews remembers Iguchi as “an A and B student and a courteous young man” who was active in the campus international-students group.

After briefly selling used cars, Iguchi joined Daiwa in New York City and spent eight years handling back-office paperwork for government-bond trading. He was promoted to trader in 1984 and, because the office was a small one, remained in charge of keeping the books. But things took a wrong turn from the get-go when Iguchi lost an estimated $200,000 trading bonds and allegedly recouped it through his illegal scheme. “We had great expectations for him, and so he felt obliged to keep going instead of coming clean,” says Kenji Yasui, a Daiwa deputy president.

Iguchi grew bolder and bolder, reportedly trading as much as $500 million worth of bonds in a single day. But by late 1993, Iguchi was finding it increasingly difficult to dip into Daiwa’s bond accounts to make up for losses. That year, Daiwa split up the bond-trading and record-keeping functions in its New York offices. In his letter to bank president Fujita, Iguchi reportedly said the change had made it hard to continue concealing his losses. Yet the very fact that Iguchi kept up the deception for two years more heightened suspicions on Wall Street that someone within the bank helped him carry out the fraud.

Like Leeson, Iguchi may have gone unchecked for so long because he regularly reported profits. “This scandal brings to light a culture on Wall Street,” says Cohen of Hermes Capital. “In all trading rooms–in banks, in securities firms–when people make money, you leave them alone. No one wants to upset the apple cart.” Not until the apples turn out to be rotten.

–Reported by Edward W. Desmond/Tokyo and Barbara Rudolph/New York

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