The numbers are startling even after years of huge financial scandals. Eleven years. Thirty thousand unauthorized trades. $1.1 billion vanished. How could one trader lose an average of $400,000 every business day since 1984 and not draw attention? Iguchi’s deals weren’t even complicated, like the stock-index arbitrage with which Nicholas Leeson lost $1.4 billion for Barings, the British merchant bank, or the derivatives that helped drill a $1.7 billion hole in the investment fund of Orange County, Calif. These were plain old U.S. government bonds, rock solid, easy to value, the most widely traded financial instruments in the world. Iguchi’s strategy for losing money was age-old: buy high, sell low. Somehow, nobody noticed. Daiwa executives rushed to plead for forgiveness. “We are deeply embarrassed that our internal controls and procedures were not sufficient,” said Masahiro Tsuda, general manager of the bank’s New York branch. But Daiwa’s apologies don’t answer the question: how did such a massive fraud go undetected for so long? It’s not yet clear whether Daiwa executives were in the dark or simply closed their eyes, but many Wall Streeters expect more names to come out soon. Says a leading Treasury dealer, “This was too big, too long, to be a surprise.”
The suspect is as improbable as the story. “Tosh” Iguchi was no flamboyant Master of the Universe. If anything, he seems to have traveled in the slow lane. Much of his life story is still a mystery. A native of Kobe, the Japanese port near the epicenter of January’s killer earthquake, he apparently skipped college in Japan-an indication that he may have scored poorly on the tough university-entrance exams. He turned up instead at Southwest Missouri State University in the spring of 1970. There, remembers former math professor Howard Matthews, he earned more B’s than A’s–“a good student, but no more.” Along the way he joined the cheerleading squad, took some art classes and married an American, Vicki Bowman. It took Iguchi five years to earn his psychology degree. After a stint selling used cars, he joined Daiwa’s New York branch as a clerk in 1976. Eight years later, as Daiwa joined other Japanese banks in a headlong rush to cash in on Wall Street’s boom, he started trading bonds.
He started small-time, and he stayed that way. Daiwa Bank (which is unrelated to Japan’s Daiwa Securities Co.) is a bit player in the U.S. bond market. It is not one of the primary dealers that distribute new Treasury bond issues; instead, like a thousand other institutions, it buys bonds today and resells tomorrow, making short-term bets on interest rates, as well as buying for its customers. Iguchi booked steady profits and won steady promotions, rising to executive vice president. Outside the office his life was unremarkably Middle American: a divorce in 1987 (Vicki got the ‘82 BMW, he kept the Isuzu Trooper), custody of the two kids in 1990, a two-story colonial in a New Jersey suburb with a pool table, a basketball hoop and a small carp pond. His neighbors say they’ve never met him. “He was one of the nicest clients I ever had,” recalls his divorce lawyer, Susan Nussbaum. “He lived conservatively. He wasn’t a high flier by any means.” Only one thing set the gray-suited executive apart. He traded, but he was also still a clerk. In order to save money, the paperwork that told Daiwa what he had bought, what he had sold and what it owned was left in his hands.
He might as well have held the keys to Daiwa’s vault. “It’s the ABC of risk control that you don’t let your traders do the back-office work,” says Hal Scott, a banking expert at Harvard Business School. Letting Nick Leeson combine those two jobs in Singapore proved fatal to Barings last March. Iguchi took full advantage. But he was a company man. He apparently wasn’t stealing money, just hiding his own mistakes. Early on, the novice trader misjudged the market, racking up a $200,000 loss as interest rates moved against him. Riskier trades followed as he tried to recoup. Nobody had to know; with his hands on both levers, it was easy to doctor the records to make bad trades look good. To raise cash to pay Daiwa’s brokers, Iguchi would order Bankers Trust New York Corp. to sell bonds held in Daiwa’s account. The statements from Bankers Trust came to . . . Iguchi. According to the FBI, he forged duplicates, complete with bond numbers and maturity dates, to make it look as if Bankers Trust still held the bonds he had sold. By July Daiwa thought its account held $4.6 billion of bonds. In fact, only $3.5 billion was left.
Utmost trust: Iguchi’s dual role made fraud possible. But that alone can’t explain how $1.1 billion slipped through Daiwa’s fingers. As seven Daiwa branch managers came from Osaka and went back home, Iguchi gained extraordinary autonomy. An American in a Japanese bank would have faced constant scrutiny, New York bankers agree. But although Iguchi had never worked for Daiwa in Japan, he spoke Japanese, he was Japanese, and his bosses, unfamiliar with bond trading, gave him their utmost trust. “The Japanese banks are notoriously loose,” says an American officer at a Japanese bank in New York. Daiwa also neglected the most basic safeguards. Take, for example, the matter of audits. Daiwa confirms that its staff auditors had reviewed the New York branch several times since 1984. Sources at Bankers Trust, however, say Daiwa’s auditors have never contacted it to verify Daiwa’s bank statements; if they had, Iguchi’s fraud would have been exposed. Ernst & Young, Daiwa’s outside auditor, says it has never audited the branch. Or consider Daiwa’s vacation policy. Many banks make employees take annual leave-not for their health but because a two-week absence makes it harder to juggle the books. “Iguchisan did not take a long vacation at all,” says a Daiwa spokesman. “If he left, it was only for a couple of days.”
The scam might have lasted far longer had another bank scandal not intervened. The 1991 collapse of the crime-ridden Bank of Credit and Commerce International, which had evaded regulation by moving money among subsidiaries around the world, led to a crackdown on foreign banks. The New York Banking Department had been Daiwa’s main regulator. In 1992 the Federal Reserve Board stepped in. Fed examiners quickly figured out that Iguchi was both trading and running the back office and told Daiwa to clean up its act. A new audit team arrived from Tokyo. But the full extent of Daiwa’s problems escaped even the Fed. Just a year ago it granted Daiwa broader powers to sell securities, finding its “managerial resources” adequate.
Finally, as Daiwa’s auditors came nearer to uncovering his secret, Iguchi succumbed to the pressure of 11 years of deception. On July 15 he mailed Daiwa president Aldra Fujita a 30-page typewritten letter marked “personal and confidential.” It was, he said, his “honest confession,” a rambling account of his sins. Loyal to the end, he then helped top executives from Tokyo tote up their losses. He didn’t even retain a lawyer. Daiwa waited two months before notifying authorities; with Japanese depositors edgy over the weak state of their banks, it didn’t want to announce a disaster until it could find profits to fill the hole. All the while, Iguchi stayed on the payroll. By Daiwa’s accounting, the only guilty party is now in jail. “He created a system where he was in charge of everything,” Fujita said. But if Daiwa permitted him to run everything, Iguchi may not be the only person to blame.
