After The Deluge

No one would have noticed the gaggle of Japanese executives winding their way through the crowded white marble lobby. It was midsummer in New York, and well-heeled Japanese passed every day beneath the twin Stars and Stripes fluttering outside the Park Lane Hotel. This particular group may have looked a bit grimmer than most, for they had just arrived from across the Pacific, blue-suited and ready for business. But then, the Park Lane, with its mahogany furniture and Mercedes-Benzes idling out front, is nothing if not a place for doing serious business--and doing it discreetly.

Until the arrival of the gentlemen from Daiwa Bank, in fact, the Park Lane had known only one whiff of scandal, when its owner Leona Helmsley, the "Queen of Mean" of tabloid fame, was jailed for tax fraud. Her tarnished throne room provided just the right ambience, perhaps, for these guests. For in brazen defiance of U.S. banking authorities, they were perpetrating what is widely considered to be the worst case of international financial fraud since the infamous 1991 scandal involving the Bank of Credit and Commerce International.

If punishment should suit the crime, the Federal Reserve last week meted out the stiffest possible. In an unprecedented display of fury, it revoked Daiwa's charter and kicked it out of the country. At the same time, the U.S. Attorney's Office in Manhattan filed 24 counts of criminal conspiracy and fraud against the bank. The charge: attempting to conceal more than $1.1 billion in trading losses from U.S. regulatory authorities, in a scheme largely hatched at the hotel. "Daiwa and a number of its highest senior officials themselves committed crimes as they attempted to cover up other crimes," said U.S. Attorney Mary Jo White. The bank's pattern of deceit went back almost 10 years, the indictments allege, and ranges from lying to Fed officials to forging documents. The general manager of Daiwa's New York office, Masahiro Tsuda, faces up to eight years in prison on charges of deceiving federal regulators and faking bank documents. Daiwa itself could be forced to pay fines of more than $1 billion. As for the errant trader who lost the money over 11 years, Toshihide Iguchi: he has already pleaded guilty to federal fraud, and the Nov. 2 indictment is thought to depend much on his account of events.

For Daiwa, Japan's 10th largest bank, the loss of its U.S. market and international reputation could be a death knell. Sumitomo Bank, the world's second largest, was quick to express interest last Friday in taking over the bank. That's exactly what U.S. officials hope. Their worry is not just the rocky condition of Japanese banks, many of which are saddled with massive bad debts and are considered such high risks they pay a "Japan premium" to borrow. They are also incensed by what they regard as the intolerable laxity (and possible complicity in fraud) of the agency that's supposed to be supervising them, Japan's Ministry of Finance. Last month the MoF admitted that it had known about Daiwa's losses for six weeks before informing U.S. authorities. Initially top officials lied about that fact, then refused to apologize for their cover-up. As much as a rebuke of Daiwa, the Fed's action last week was a warning to the MoF: clean up your act. "The best way [for Japan] to put Daiwa behind," the chairman of the House Banking Committee, Rep. James A. Leach, said last week, is to press for a rigorous overhaul of its bank-regulatory system.

So far, the MoF seems even less interested in mending its ways than in apologizing. Top officials still insist that to the best of their knowledge Iguchi was acting alone. But the frenzied meetings at the Park Lane belie such claims. If anything, they suggest that Iguchi, at least, believed he would get all the help he needed from his bank-and the MoF--in covering up his deeds. On July 24, the trader sent one of several letters to Daiwa's president, Akira Fujita, warning that his $1.1 billion loss might be detected ff headquarters did not secretly cover his losses. If Daiwa colluded with him, he argued, "there is zero possibility that this ease would be found out." During a subsequent conference call from Osaka, prosecutors say, Daiwa's deputy president, Kenji Yasui, pointedly asked Iguchi "for suggestions on ways that Daiwa could continue to conceal the loss."

Days later, a delegation of Daiwa execs, led by managing director Hiroyuki Yamaji, boarded a plane for New York. On July 28 and 29, the Justice Department claims, they met with Iguchi and Tsuda at the Park Lane. Yamaji then asked Iguchi to rewrite his original confession letter, federal investigators charge, leaving out everything except the information about his unauthorized trading, and to destroy the original computer disc. And so the deception went, getting ever more tangled.

There is still no end in sight. "The investigation is continuing," says the U.S. attorney's spokesman, Marvin Smilon. The Fed, meanwhile, has sent a message: it is willing to use the maximum penalty under tough accountability rules for foreign banks adopted after the BCCI debacle. That message, dearly, was heard.