Daiwa Case Study Essay

The executive vice president of Daiwas reinvigorated York discriminate had traded a counseling the banking comp eachs money over 11 grand time an extraordinarily long period for such a fraud to manoeuvre art object using his position as train of the branchs securities custody department to cover up the loss by merchandising off securities owned by Daiwa and its customers. The wrick loss was one of the largest of its kindly in biography. that it was the cover-ups by Iguchi over a period of geezerhood, and thence by elderberry bush managers at Daiwa between July 13 and phratry 18 1995, when the bank eventually reputationed the loss to the US national oblige Board, that did the real reproach. These take to criminal indictments against the bank and its componentrs and, eventually, to one of lacquers largest commercial banks being kicked out of the US markets. Un want Barings chamfer, which was swallowed up by similar failures in hazard vigilance sooner in the analogous year, Daiwas $200 cardinal of as rigs and $8 billion of reserves meant it was broad enough to survive the hit. But punishment by US regulators and universe humiliation dealt a massive blow to Daiwas reputation. The s brookdal set in train a longterm change in strategy as Daiwa reigned in its international ambitions and concentrated on its core businesses in japan and Southeast Asia. There were also long-term per-Lessons learnedG Risk-taking functions must be segregated from record-keeping and hazard assessment functions. Its a lesson thats right off been largely learned in name of segregating bargainers from the rearward office nevertheless it has much wider applications G Structural problems in risk solicitude dont put themselves right. Daiwa had many warning foretokenals active the look risk management was organised at the clean York branch, but chose to moot that local managementhad learned its lesson G Massive fraud can continue for many years in an e nvironment of lax controls Iguchi do his confession non because he feared he was approximately to be caught, but instead when he realised that the situation might some otherwise give tongue to on indefinitely G Years afterward(prenominal)(prenominal) an event, failures in risk management remain a threat to the personal finances of senior executives if the executives can be shown to have acted inappropriately. sonal repercussions for Daiwas senior managers.Five years after the debacle broke, on 20 phratry 2000, in a decision that was instanter challenged, a Japanese court in Osaka told 11 catamenia and former board members and top executives from Daiwa to redeem the bank $775 jillion in damages. The record-breaking award, which followed sound action by shareholders, was to atone for the management failure of oversight, attempted cover-ups, and the break checkmate of risk management in the new-fashioned York branch that lead up to the debacle. treasury securities as pa rt of Daiwas services to its pension fund customers. During the 1980s the New York desk became a of import force in the US government debt market and was designated as a primary market dealer in 1986.When Iguchi was promoted to become a trader in 1984, he did non relinquish his back-office duties. All in all, he supervised the securities custody department at the New York branch from almost 1977 right through and through to 1995. This lack of segregation, a relatively common bear of small affair desks in the earlyish 1980s but already a discredited practice by the early 1990s, led to Daiwas downfall. Daiwas New York branch managed the custody of the US Treasury bonds that it bought, and those that it bought on behalf of its customers, via a sub-custody narration held at Bankers Trust. Through this ac numerate, interest on the bonds was cool and dispersed, and bonds were transferred or sell according to theThe StoryToshihide Iguchi, a Kobe, Japanborn US citizen who majored in psychology at Southwest Missouri State University, Springfield, joined Daiwas New York branch in 1977. There he learned how to streamlet the small back office of the branchs securities business. Opened as an office in the 1950s, the Daiwa New York branch began dealing in USwishes of either customers or the banks own managers. Daiwa and its customers kept brood of what was happening in this account through transaction reports from Bankers Trust that flowed through Iguchi, in his role as head of the back office. When Iguchi lost a few hundred thousand dollars early on in his trading activities, he was tempted into selling off bonds in the Bankers Trust sub-custody account to break off his losses.Then, in the words of the FBI agents who investigated the suit He unavowed his unlicenced sales from the custody account by falsifying Bankers Trust account statements so that the statements would not indicate that the securities had been interchange. As he lost to a greater extent money trying to trade his route back into the black, it became hard work keeping alive this parallel series of reports. But luckily for him, Daiwa and its intimate size upors never independently confirmed the custody account statements. Later on, while he served his sentence, Iguchi was asked by Time magazine whether his early actions felt like a crime.To me, it was only a violation of internal rules, he said. I think all traders have a tendency to fall into the identical trap. You always have a way of obtaining the loss. As long as that possibility is there, you either admit your loss and lose example and your job, or you wait a little a month or two months, or however long it takes. In Iguchis case it took 11 years, during which time he is said to have forged nearly 30,000 trading slips, among other documents. When customers sold off securities that Iguchi had, in fact, already sold offon his own behalf, or when customers needed to be compensable interest on long-gone sec urities, Iguchi settled their accounts by selling off to that degree more securities and changing yet more records. Eventually about $377 trillion of Daiwas customers securities and about $733 billion of Daiwas own investment securities had been sold off by Iguchi to cover his trading losses. As Iguchis bare success grew he later said that at one saddle his deskproduced half the New York branchs nominal profits ulterior investigation showed that risk control lapses and cover-ups were part of the culture of Daiwas New York operation in the 1980s and 1990sAccording to the peaks laid against the bank by US officials, Daiwa had gone so far as to temporarily relocate authorized traders and, when necessary, to disguise the trading room at the business district office as a storage room during regulatory examinations. Following a regulatory rebuff in 1993, the bank had assured regulators that traders would no time-consuming report to Iguchi while he occupied his role as head of t he securities custody department. In fact, the branch continued to operate without a right-hand(a) division of responsibilities. Furthermore, during the 1995 investigation, Iguchi revealed that between 1984 and 1987, other Daiwa traders had suffered major losses these had apparently been concealed from regulators by shifting the losses to Daiwas overseas affiliates (FDIC, 1995).he became several(prenominal)thing of a golden boy at Daiwa. But the losses accumulated until by the early 1990s it was difficult for Iguchi to continue to hide them, particularly after 1993 when Daiwa make nearly limited efforts to split up its trading and back-office functions. barely he managed to survive for another two years before engineering science his own day of reckoning. Iguchis survival wasnt entirely down to luck. Subsequent investigation showed that risk control lapses and cover-ups were part of the culture of Daiwas New York operation in the 1980s and early 1990s, to a cockeyed degree. Fo r example, during the 1995 investigation of the Iguchi affair, the bank was also charged with operating an unauthorised trading area for securities between 1986 and 1993.Confession and cover-upIn Iguchis confessional letter to Daiwa in mid-summer 1999 (he sent a stream of letters and notes to the bank after that initial July 13 letter) the rogue custody officer suggested that his superiors keep the lossessecret until appropriate measures could be taken to stabilise the situation. It was a speck that was taken up. In the period after July 13 and before about September 18, when Daiwa belatedly advised the Federal Reserve Board of the loss, certain of Daiwas managers connived with Iguchi to prevent the losses being discovered, despite a legal requirement to report misdoings immediately to the US regulators.For example, during September 1995, Iguchi was told to pretend to be on holiday so that a scheduled August 2001 audit would have to be postponed he was in fact in the New York apart ment of a Daiwa manager helping to reconstruct the trading history of his department. Daiwas managers seem to have been hoping to transfer the loss to Japan, where it could have been dealt with out-of-door the scrutiny of the US regulators and markets. After Daiwa told regulators about the loss on September 18, Iguchi was taken to a motel and questioned directly by the US Federal berth of Investigation.He told FBI agents about what had gone on in the months following his initial confession to Daiwa, and the bank was shocked to find itself facing a 24-count indictment for conspiracy, fraud, bank exam obstruction, records falsification and failure to disclose national crimes. Daiwa argued, rightly, that not a single customer of the bank had lost any money. At the time of the incident, Daiwa was one of Japans top 10 banks and one of the top 20 banks in the world in terms of addition size. Like most other Japanese, and some European, banks, it had massive hidden profits on its balanc e sheet that were not accounted for due to the licit historical accounting method that it employed. That gave Daiwas management considerable liberty of action if unex-Timeline of eventsJuly 13, 1995 Toshihide Iguchi of the New York branch of Daiwa Bank confessesto superiors that he has lost $1.1 billion over 11 years while trading US Treasury bonds. August 8 Japans ministry of finance is informed about the grime by Daiwa. September 15-18 Daiwa belatedly reports the loss to the US Federal Reserve Board, warning that immediate disclosure of a loss of that magnitude might threat the fiscal viability of the bank. September 23 Iguchi wondered at a motel by FBI agents who later arrest him. September 26 Iguchi fired by Daiwa and the extent of the banks loss do public. October 2 US authorities order Daiwa to put an end to most of its trading in the US, having already shocked the bank by indicting it on serious charges. declination 1996 Iguchi sentenced to four years in prison and a $2. 6 million penalisation (fine and restitution netments). End January 1996 Daiwa agrees to sell most of its assets and offices in the US. February 1996 Daiwa agrees to pay a $340 million fine to avoid further legal battles over its institutional role in the Iguchi affair one of the largest ever fines in a criminal case in the US. 20 September 2000 Osaka court says some current and some former board members and executives from the bank must pay the bank $775 million as restitution to shareholders. The board members and executives immediately cost against the decision.One of the banks crisis management actions after Iguchi confessed was to pump back into the defrauded account securities equivalent to those that their New York head of custody had sold off. But the US regulators were deeply sad at the attempted coverup, and at the way Daiwa had seemed to ignore regulatory warnings over a tot up of years. They were also unhappy that at least one senior member of Japans ministry of fi nance knew about the Daiwa scandal in early August and had not informed his US regulatory counterpart. This pushed the Daiwa scandal onto the international political gift and led to a telephone conversation in which Japans finance minister, Masayoshi Takemura, was obliged to make apologetic noises to US Treasury secretaire shearert Rubin for his staffs failure to pass on the information.(The call was made only after Takemura had annoyed US officials by denying at an earlier press conference that his ministry had failed in its duties his aides later denied that any conventional apology had been made to Rubin.) At a time when the Japanese banking corpse was already showing signs of strain from the slowing Japanese economy and deterioratingasset quality, many international regulators took the Daiwa scandal and its aftermath as a sign of the continuing lack of openness in Japanese banks and the Japanese financial system. Meanwhile, Daiwa faced more immediate problems. In November 1 995, the Federal Reserve request it to end all of its US operations August 2001within 90 days.By January 1996, Daiwa had agreed to sell most of its assets in the US, totalling some $3.3 billion, to Sumitomo Bank and to sell off 15 US offices. (Indeed, for some time after the debacle, Daiwa was rumoured to be on the verge of merging with Sumitomo.) In February 1996, Daiwa agreed to pay a $340 million fine a record amount for a criminal case in the US as a way of laying to rest the charges that US authorities had brought against it. All in all, it endured some of the stiffest punishments ever meted out to a foreign bank operating in the US. By this point, senior figures at the bank had resigned or indicated they would take early retirement.Top management said it would cut its own pay for sixer months and forgo bonuses as a sign of contrition. Iguchis nightmare was now dissipating. In October 1995, he had reached an agreement with his US prosecutors and admitted misapplication of b ank funds, dishonorable entries in bankbooks and records, money laundering and conspiracy. Iguchi told the judge at early hearings that by the time he confessed After 11 years of fruitless efforts to recover losses, my life was simply filled with guilt, fear and deception. He said he sent the confession letter because he couldnt see that anyone other than himself was possible to bring the situation to an end. In December 1996, he was sentenced in New York to four years in prison and a $2.6 million penalty that he had little chance of paying. The cover-up also led to one of Iguchis managers being sent to prison for a number of months and fined a few thousand dollars.The AftermathAs this account makes clear, Daiwas 1995 debacle resulted in huge losses acriminal charge against the bank Daiwas forced exit from US markets general reputational damage to Japanese banks and regulators senior resignations at Daiwa and a diplomatic spat between the US and Japan. In the medium term, the scan dal led indirectly to monetary standard & Poors downgrading Daiwas credit rating from A to BBB, and to Japans ministry of finance imposing certain restrictions on the banks activities for a year or so. It also temporarily threatened the credibleness of its profitable want business. In the longer term, the scandal obliged Daiwas management to refocus the bank on its traditional retail and trust banking units. By 1998, this refocus and the general malaise in Japanese banking led Daiwa to announce that it would close down many of its international offices to concentrate on its role as a super-regional bank in Southeast Asia, with a specific focus on the Osaka region.Bank executives at the time of the scandal in 1995 found that it dogged them into the new millennium. On 20 September 2000, the BBC reported that a Japanese court had ordered 11 current and former board members and executives from the bank to pay the bank $775 million in damages, much of it awarded against the presiden t of Daiwas New York branch during the Iguchi period. Judge Mitsuhiro Ikeda made it clear that the award was compensation to the banks shareholders for the fact that the risk management mechanism at the New Yorkbranch was effectively not cognitive operation, as well as for managements failure to report the incident promptly, and failures in oversight.Some commentators were surprised by the size of the recordbreaking award, however, and the executives immediately appealed against the decision and filed pleas with the court to suspend any seizure of their assets. Whether or not the award stands, many commentators at the time said that it marked a broader change in attitudes about executive and board responsibility. In Japan, as in most developed economies, it is becoming more and more likely that senior management in charge of a bank or corporation at the time of a disaster will be held personally accountable. I This case study was written by Rob Jameson, ERiskWeb ResourcesAsiaWeek, Japans $1-Billion Scam, October 27, 1995 BBC News, Bank BossesPay $775m dissimulator Charge, 20 September, 2000 Electric Law Library, Criminal Complaint and indictment Against Daiwa Bank, 11/95 FDIC press release Regulators terminate the US operations of Daiwa Bank, Ltd, Japan, PR-67-95, November 11, 1995 Time magazine, A Blown Billion, October 9, 1995 Time magazine, I Didnt Set Out to Rob a Bank, short interview with Iguchi, February 1997