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Billion-Dollar Japanese Bond Loss Raises Questions About System

September 26, 1995

TOKYO (AP) _ The latest embarrassment for Japan’s banking system raises the question: How can Japanese banks be trusted to clean up their bad-debt problems when one of the biggest couldn’t tell that a billion dollars was missing?

The tale of Daiwa Bank’s former trader Toshihide Iguchi _ who the bank said ran up $1.1 billion in losses in unauthorized trades _ bears striking parallels to that of Nicholas Leeson, the trader who brought down Britain’s Barings investment bank after losing $1.4 billion.

Daiwa, a much larger bank than Barings, will survive, but the bank’s announcement Tuesday highlighted flaws in Japan’s banking system.

``Risk management is so weak″ in Japanese banks, said Yukiko Ohara, an analyst at UBS Securities Ltd. ``Among the advanced nations it may be the worst.″

Like Leeson, the 44-year-old Iguchi was in charge both of trading and of the backroom operations that monitor trades, meaning he was policing himself.

Daiwa said Iguchi sold stock owned by the bank to cover up his losses in trading U.S. government bonds, then hid account statements and altered documents to keep his superiors in the dark.

But while Leeson’s losses piled up in less than two months, Iguchi is accused of carrying out his scheme over 11 years and an estimated 30,000 unauthorized trades.

``Foreign investors have become more skeptical about the financial system’s stability,″ Ohara said. ``If they think that (Daiwa-style) losses are going to happen one after another, then what is going to happen to the Japanese financial system?″

Japanese leaders, trying to restore confidence in the economy, made no secret of their anger at Daiwa.

Finance Minister Takemura summoned Daiwa officials for a reprimand, and the chief government spokesman, Koken Nosaka, said it was ``extremely regrettable″ that Daiwa had not exercised more control.

Japanese banks are already swimming in debt. The government estimates that Japanese banks hold more than $400 billion in nonperforming loans, many extended during a period of heavy property and stock speculation in the late 1980s. Property prices then declined when Japan’s economy went into recession in the 1990s.

Daiwa Bank is one of Japan’s 11 major commercial banks, with total assets of $182 billion as of March 31.

Iguchi, who studied at Southwest Missouri State University, joined Daiwa in 1976 in New York. He earned a reputation as an expert in U.S. government bonds and by 1979 was given responsibility for both trading and backroom operations, Daiwa officials said.

``We entrusted him with everything _ we really trusted him and evaluated him too highly,″ said bank president Akira Fujita.

In July, Iguchi found himself unable to cover his losses, and wrote a letter to Fujita explaining the unauthorized trades, bank officials said. He was fired on Monday. On Tuesday, U.S. officials said he was under arrest, charged with falsifying records in connection with trading losses.

``We are deeply embarrassed that our internal controls and procedures were not sufficient to prevent this fraudulent action,″ Masahiro Tsuda, general manager of Daiwa’s New York branch, said in a statement.

He said stringent new procedures will be adopted to prevent a similar loss.

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