A Japanese rogue trader with a billion dollar loss to his name has set out his case to apportion leniency to traders who take advantage of lax internal controls to hide towering losses.
“One must examine the motive of these rogue traders,” believes Toshihide Iguchi, formerly of Daiwa Bank. “What drove them to these reckless acts? Greed? Fear? Need for recognition? Addiction? Moral upbringing? Some sort of character disorder? Or something else?”
He spent two years in jail for his actions. On being sentenced, the trial judge said it was a priority that the time Iguchi would spend in jail should provide adequate deterrence to criminal conduct.
He said that that the jail sentence needed to send a message to those in a position to do similar harm to their employers, namely that people entrusted with the ability to threaten institutions had to know that even with extensive co-operation, their punishment would be more than a mere slap on the wrist.
In Iguchi’s case, he claimed that his motive was simply that he didn’t want to lose his job and he feared that his losses would cost him his livelihood. Having said that, he admitted if he had his time over again and found himself in the same circumstances, he would probably act in an identical way. “A trader always thinks he stands a chance of making himself whole. Rogue trading is like quicksand. You get sucked deeper in.”
Iguchi is visiting Hong Kong to lay out his crusade for the industry. He doesn’t consider that he has done anything venal, and did not deserve the punishment he received. He has written a book titled ‘My billion dollar education’ which contains his formula for ending rogue trading.
His offence took place in New York in the early 1990’s while he was working at the Japanese firm. Starting out in the operations department, he inherited additional Treasury bond trading responsibilities. An attempt to cover up a US$70,000 loss spiralled into a billion dollar loss, which he was able to conceal due to both his dual roles plus a control system that he could circumvent.
Eventually he gave himself up by a letter of confession to the CEO of the company. Daiwa Bank initially kept quiet and tried to work through the problem using Iguchi and his records to figure out the losses. That was a fatal mistake on their part, as they later received a $340 million fine for not turning him in immediately. It ultimately cost Daiwa Bank its US business.
“Regulatory remedies notwithstanding, there are steps we can take to prevent these rogue trading losses from happening ever again,” he said. “Lawmakers should disqualify unauthorized trading as fraud. In the absence of criminal intent, unauthorised trading should be dealt with as a civil matter.”
If blame is to be attributed, he believes it should be directed towards senior management, which should know the products and their inherent risks, so that they have realistic expectations of profit potential. He feels they should establish a strong infrastructure to control its trading activity and encourage traders to come forward if they are in violation of the internal rules by offering a choice of a clean slate or walking away. In addition, he feels the losses incurred are the price for having less than perfect internal controls.
“This is the point at which you want to ‘reward’ the trader to tip the scale to come forward”, he said. “At this point, a trader is only thinking about recouping the loss in a short time. Losing a billion dollars and going to prison is not in his realm of possibility.” Could traders take this reward system for granted though, and keep racking up the losses? “No, once a trader gets out of this jam unscratched, he will never do it again. Besides, he knows how valuable his job is and will never do anything to risk losing it. Of course, if he loses all the time, the firm will fire him. That is the reality that all traders accept. I am not suggesting that we reward traders for losing money. The reward is to come forward after he commits rogue trading and he has no way but to continue.”
He believes that what these judges are missing in a rogue trader trial, is that the amount of money the institution has lost is not commensurate with either the level of venality or the pecuniary gains the trader has enjoyed. Instead, his campaign states that the reason these banks suffered losses of billions of dollars is due to the corporate culture and the lack of proper oversight that allowed such activities to continue.