Daiwa Case

Case: Daiwa Bank

How Daiwa Bank incurred losses?

On July 1995, Daiwa Bank’s New York branch executive vice president, Toshihide Iguchi has confessed that he had traded away the bank’s money over 11 years. In a 30-pages letter to the president of Daiwa Bank, he admitted that he had lost around $1.1 billion while dealing in US Treasury bonds. To cover up the loss, he sold off securities owned by Daiwa and its customers.

In 1950s, Daiwa New York branch began dealing with US Treasury securities as part of the bank’s services to its pension fund customers. In 1986, the New York desk was designated as a primary market dealer. A relatively common feature of small trading desks in the early 1980s but already a discredited practice by the early 1990s, led to Daiwa’s downfall.

Daiwa’s New York branch managed the custody of the US Treasury bonds that is bought and those bought on behalf of its customers. This is done via the sub-custody account held at the Bankers Trust. Through this account, bonds were transferred or sold according to the wishes of the customers or the bank’s managers. Eventually, this account that contains transaction reports from the Banker Trust was flowed through Iguchi, in his role as the head of the back office.

In his early trading activities, Iguchi has lost a few hundred thousand dollars. He sold off bonds in the Bankers Trust sub-custody account to pay off his losses. In order not to get caught, he covered his unauthorized sales from the custody account by falsifying Bankers Trust account statements.

When customers ordered to sell off the securities that Iguchi held (already sold off on his own behalf), Iguchi settled the accounts by selling off more securities and changing more records to cover his losses. About #377 million of customers’ securities and $733million of Daiwa’s own investment securities has been sold off by Iguchi to conceal his trading losses.

According to a regulatory rebuff in 1993, traders would no longer...