BOOTING OUT THE BANK

TO HEAR U.S. PROSECUTORS TELL IT, the stunts that Japan’s Daiwa Bank used to conceal the nefarious conduct of its Manhattan office might have come from The Sting. The end result, however, was more akin to the farcical Dumb and Dumber. Among the flagrant ruses employed by Daiwa, prosecutors said, was disguising a downtown trading floor as a nondescript storage room during audits by Federal Reserve regulators. But no sooner had the Feds left than the traders reappeared–led by Toshihide Iguchi. It was his dual role as chief bond trader and bookkeeper that ultimately brought the bank to grief by enabling him to rack up $1.1 billion in undisclosed losses from 1984 until his scheme came to light this past summer.

If the bank’s antics seemed right for a farce, their impact became the stuff of high drama last week when federal regulators gave Daiwa 90 days to pack up and leave the U.S. In a move coordinated with the regulators, a federal grand jury in New York City indicted the bank on 24 criminal counts of conspiracy and fraud connected with a cover-up of Iguchi’s losses. That could lead to $1.3 billion in fines if the bank is convicted. Masahiro Tsuda, general manager of Daiwa’s New York City office, was charged with taking part in a conspiracy with the bank and Iguchi, who last month pleaded guilty to concealing the losses. The moves were the most sweeping ever taken by the U.S. against so formidable a foreign lender. With $390 billion in total assets, Daiwa is the 10th largest bank in Japan and the 13th largest in the world.

The bank, which contends that the Osaka home office was unaware of Iguchi’s actions, responded with a mixture of contrition and defiance. Daiwa agreed to leave the 13 states where it has offices, which account for some 15% of the bank’s international assets. But the president of Daiwa, Takashi Kaiho, lashed out at the indictments, calling them “very inappropriate,” and vowed to fight the charges. At the same time, Kaiho said the bank would reappraise its foreign ventures and slash its work force from 9,600 to 7,000 employees.

“You cannot be a global player without a presence in the U.S.,” says James McDermott, president of the consulting firm Keefe, Bruyette & Woods. He predicts that the bank may soon be acquired by a buyer like Sumitomo, Japan’s second largest bank, which is reportedly close to a deal.

In cracking down on the bank, U.S. officials sought to punish Daiwa without worsening Japan’s year-long financial crisis or generating new tensions between the two countries. Just last month the Federal Reserve agreed to help rescue U.S. branches of Japanese banks if a bailout is required. But Treasury Secretary Robert Rubin was furious at Daiwa for waiting six weeks to notify U.S. authorities of Iguchi’s illegal activities; the trader told the bank about them in a letter in July. Rubin vented some of that ire last month in a 20-minute phone conversation with Japanese Finance Minister Masayoshi Takemura, whose ministry had also learned of Iguchi’s crimes but delayed informing Washington. Takemura expressed regret for the delay and promised it wouldn’t happen again. After the U.S. action, the Finance Ministry moved promptly to discipline Daiwa.

Last week’s 37-page indictment portrayed a giant Japanese bank that was proudly confident of its ability to deceive U.S. authorities. This arrogance shone through a series of letters that Iguchi wrote to his superiors in July after confessing his wrongdoing. In one such letter on July 24, Iguchi said there was “zero possibility” that Federal Reserve inspectors would find him out if the bank were to buy back some of the Treasury securities that he had illicitly sold to conceal his losses. The same hubris permeated skull sessions that allegedly took place when Iguchi met with a Daiwa managing director from Osaka and the head of the New York branch on July 28 and 29 in Manhattan’s Park Lane Hotel. The indictment said the managing director insisted that the cover-up continue until Daiwa could report its financial results for the six months ending Sept. 30.

But all went for naught after Daiwa reported Iguchi’s activities to Japanese regulators on Aug. 8 and finally told Washington on Sept. 15. “This investigation is continuing,” a spokesman for the U.S. Attorney’s office in Manhattan acknowledged last week. Wall Street watchers don’t doubt it. Their suspicion: Daiwa’s Keystone cover-up that failed may have more reels full of capers.

–Reported by Satsuki Oba/Tokyo, Barbara Rudolph/New York and Adam Zagorin/Washington