MY

BILLION
DOLLAR
EDUCATION
Inside the Mind
of a Rogue Trader

TOSHIHIDE IGUCHI
Copyright © 2014 by Toshihide Iguchi

www.toshihideiguchi.com

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The moral right of the author has been asserted

ISBN: 978-988-13373-8-2
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About the Book

The untold story of a rogue trader, whose decision to right a wrong ignited a
series of political maneuvering by American and Japanese officials, leading
to the expulsion of a major Japanese bank from the U.S.
At 18, Toshihide Iguchi came to the U.S. with high hopes. Graduating from
college in Missouri, marrying a St. Louis girl, and landing a promising job
at Daiwa Bank in New York, he was ready to embark on his American
dream. Unbeknownst to him, a storm of unprecedented financial
deregulation on both sides of the Pacific was about to rage… Twelve years
later, he found himself in the maximum security ward of a Manhattan jail,
surrounded by Arab terrorists and a Mafia boss.
The trader looks back on his psychology struggles and redemption, which
gave him valuable insight in helping others to prevent future billion dollar
trading losses.
About the Author

Toshihide Iguchi, as a trader at New York branch of Japan’s Daiwa Bank,

amassed a $1.1 billion trading loss over a 12 year period. His voluntary
disclosure to the CEO became the catalyst for the expulsion of Daiwa Bank
from the U.S.
He is now a published author, speaker, and consultant, as well as a designer
of innovative language software.
Please visit his website:
www.toshihideiguchi.com
 To: Edward M. Stroz
Without his compassion for humanity and dedication to fairness,
I would not be here to write this book.
 Contents
Prologue
Part 1: July 1995
Chapter 1: Confession
Chapter 2: Conspiracy
Chapter 3: Arrest
Part 2: 1969
Chapter 4: Early Days
Chapter 5: Trading Responsibilities
Chapter 6: The Slippery Slope
Chapter 7: The Whirlpool
Chapter 8: Flood
Chapter 9: Breakdown at Home
Chapter 10: The Downtown Office
Chapter 11: Contagious Temptation
Chapter 12: The Big Bet
Chapter 13: More Close Calls
Chapter 14: The Web We Weave
Chapter 15: A Saving Grace
Part 3: September 1995
Chapter 16: Disclosure
Chapter 17: Locked Up
Chapter 18: Convicted
Chapter 19: Dangers of Jail
Chapter 20: King of Prison
Chapter 21: The Endgame
Chapter 22: Club Fed
Chapter 23: Rogue Myths
Epilogue
 Prologue
The phrase “rogue trader” was first used by the media in 1995 when a
trader at Barings Bank fled Singapore and was arrested in Germany. The
incident was so sensationalized as his action directly brought down the 230-
year-old bank. Until this incident, however, unauthorized trading activity
had not been considered an ‘illegal’ activity, therefore, the phrase ‘rogue
trader’ had not been commonly recognized.
In the following 18 years, there had been a half dozen ‘known’ rogue
trading incidents in which the loss exceeded $1 billion, namely: Barings
Bank, Daiwa Bank, Sumitomo Corp, Societe Generale, UBS, and JP
Morgan Chase. Of these rogue trading incidents, Daiwa Bank was the only
one that took place on Wall Street, yet few Americans know much about it
because the case was all wrapped up in a month as I pled guilty and gave
the complete details of my activities. Without any elements of mystery or
suspense as we have seen in other rogue cases, the media found very little
to report. Nevertheless, the Daiwa scandal is not only the largest
unauthorized trading loss which occurred in the U.S., but also the very first
and the longest unauthorized trading on record. To that end, as the
granddaddy of all rogue trading, it has a plethora of historical significance
and lessons to be learned even today.
The 1980s was a transitional decade for the financial markets. After
soaring interest rates in the early 1980s, financial business models were
forced to change. The lending institutions especially, such as banks, were
feeling a lot of pressure from the investment bankers who were reinventing
themselves by securitizing the loans. Reeling from the deregulation of the
brokerage commission structure, investment bankers were forced to become
more innovative. The best example was the introduction of ‘junk bonds’
and the demise of the S&L banks. Meanwhile, across the Pacific, the
momentum of an export-led Japanese economy accelerated (much like that
of China today) making it the second largest economy in the world. The
burgeoning trade surplus against the U.S. and Europe drove the yen to
record levels, necessitating the Japanese Government to encourage
aggressive U.S. dollar investment.
 With this backdrop, in 1982, without any prior experience, I was given a
job by Daiwa as a trader. Some have labeled me the pioneer of rogue
trading as I started my unauthorized trading less than six months later.
Absolutely inconceivable as it may seem, a mere four years later, I had full
banking functions under my control. In most rogue trading cases, the main
culprit is the laxity in internal controls owing to an opportunistic corporate
culture. But in Daiwa’s case, it was gross ignorance of the management in
the risk business that resulted in a total lack of internal controls.
The uniqueness of my situation goes much further. I am also the only
trader who didn’t get caught. The $1.1 billion rogue trading loss came to
light only because I came forward voluntarily. It is uncommon for anyone
committing an impropriety to come forward because they are hopeful of
never getting caught. In rogue trading, the end has to come, one way or
another. I chose to end it.
Unfortunately, the scandal didn’t end there. In fact, the most significant
part of it started when I reported my $1.1 billion loss to the CEO of Daiwa
Bank. What transpired after that is something out of the movies. Because
the 179 audits performed by internal and external auditors, as well as the
U.S. and Japanese banking regulators, failed to detect my unauthorized
trading loss, a spate of blame shifting and face-saving tactics flew across
the boardroom and the Pacific.
In the end, Daiwa was fined $340 million (a record criminal fine at the
time) and ordered to close all of its 19 U.S. branch offices and leave the
country for good. Losing its U.S. banking license meant a loss of its
international banking functions for Daiwa, which had built one of the
largest networks of international operations among Japanese banks.
When we hear about these astronomical unauthorized trading losses,
one must understand that financial institutions only disclose these losses as
unauthorized losses if the amount is too large to either report as an ordinary
trading loss or to conceal altogether. It is my opinion that less than 5% of
the unauthorized trading cases are actually reported as unauthorized losses.
After all, losing a lot of money in and of itself is not a crime, even if it was
unauthorized.
Unauthorized trading is an in-house violation and if the firm is willing
to call it ‘authorized’, then neither the regulators nor the law enforcement
has any ground for stepping in. In fact, during the 12 years of my
unauthorized trading activity, I heard of unauthorized trading losses by
Daiichi-Kangyo Bank in Singapore (1982), Fuji Bank in New York (1984),
Daiwa Trust in New York (1985), Tateho Chemical (1987), and Tokyo
Securities (1994), all of which were in the millions of dollars and none of
whose traders were criminally prosecuted. Is it the amount of the loss that
makes it criminally prosecutable? If so, where is the threshold?
Furthermore, thus far, we’ve heard of these mega losses coming out of
Japan, Singapore, the U.S., England, France, and Australia but not from
other countries. How is it possible that other countries are somehow free of
these problems, especially if they are part of the global financial system?
After the $700 million loss by Allfirst (a U.S. subsidiary of Allied Irish
Bank) became public in 2002, we hadn’t heard of any major unauthorized
trading loss again until 2008, when a $7 billion loss was discovered at
Societe Generale. It was particularly shocking because this was done at the
home base of a major international bank, as opposed to overseas offices
where a complete set of controls is often lacking, notwithstanding the sheer
amount of the loss.
The unprecedented magnitude of the loss seemed to have served as a
wake-up call for every financial institution around the world. However, the
period of high alert didn’t last very long. Only three years later, in 2011,
UBS’s London office reported that its trader, Kweku Adoboli, racked up a
$2.3 billion loss trading stock indices. In May of 2012, JP Morgan Chase
announced that it lost $2 billion at its Chief Investment Office trading CDSs
(credit default swaps). When the dust settled, the loss expanded to more
than $6 billion.
No one would dispute that the global financial community has been
perfecting their trading risk control techniques and internal controls over
the years as a result of these mega losses, not to mention, electronic trade
execution systems for exchange traded commodities. Also, on the justice
front, the world has been sending tough messages by criminally prosecuting
these traders. Yet, the occurrence of such incidents seems to be not only
continuing but also escalating. Why is that? It is simply because those who
are in a position to prevent these activities are not understanding what is
prompting some traders to take the path of rogue trading.
To address the core of the issue, one must examine the motive of these
traders. What drove them to these reckless acts? Greed? Fear? Need for
recognition? Addiction? Lack of moral upbringing? Or something else?
 Unless those in a position to manage traders understand the real motive
of rogue traders, I can assure you that no matter how sophisticated the risk
control system becomes, or how severe punishment the trader receives,
there will be more billion dollar losses. My case happened several decades
ago but surprisingly, nothing has really changed. Although the set of
circumstances in which these recent incidents happened may be different,
the human nature of a trader does not change.
In the most recent rogue trading case at JP Morgan Chase, undisputedly
the best managed bank in the world, every possible risk control measure
was supposedly in place, but did it matter? No. In the U.S. Senate’s
“Permanent Subcommittee on Investigations”, the following observation
was made of the culture of JP Morgan’s Chief Investment Office: “In
contrast to JP Morgan Chase’s reputation for best-in-class risk management,
the whale trades exposed a bank culture in which risk limit breaches were
routinely disregarded, risk metrics were frequently criticized or
downplayed, and risk evaluation models were targeted by bank personnel
seeking to produce artificially lower capital requirements.”
Despite this observation, the justice department elected not to criminally
prosecute the trader who was responsible for creating the position, the head
of the operation who refused to close out the position, and the CEO who
allowed this corporate culture to permeate through his organization. Instead,
the regulators fined the bank $920 million making the loss for the
shareholders $7.12 billion.
Punishing the corporation itself by imposing enormous fines and not the
executives seems to be the accepted solution these days. In 2002, then
Deputy Attorney General, Larry Thompson, said in his speech regarding
corporate culture: “Large corporations develop their own methods and
culture that guide employees’ thoughts and actions. That culture is a web of
attitudes and practices that tend to replicate and perpetuate itself beyond the
tenure of any individual manager. That culture may instill respect for the
law or breed contempt and malfeasance. The organization itself must be
held accountable for the culture and the conduct it promotes. Without this
tool, the public would have no adequate deterrent to corporate criminal
conduct because the culture that condoned, or at least acquiesced in, that
behavior would be beyond the criminal law’s power to correct. Only by
prosecuting the corporation itself can we insure systemic reform.”
 Corporate crimes are not committed by the corporation itself (which is
nothing more than the shell that holds investment capital of the
shareholders) but by the executives and the employees of the corporations.
One can make a case that the shareholders of JP Morgan Chase really didn’t
suffer $7.12 billion because the stock rose to a new high after the initial
shock. Unfortunately, this argument seems to work only in a bull market. A
bull market papers over all the flaws in the system, until it ends.
My initial failure to report a loss of $70,000 to the bank ended up
costing me twenty-one years of freedom. That is not small change.
Although there are many factors that facilitated my activities, I have no one
but myself to blame for my shameful behavior.
Reflecting on my remorse, I feel I have made amends as best I could by
coming forward voluntarily with the full details, pleading guilty to all
charges, and forfeiting what little assets I had to the government, which left
me completely indigent. Had it not been for the woman who loved me, I
would have been on the street.
After 12 agonizing years, I spent 15 months locked up in a solitary cell
along with some of the most notorious international criminals. After four
years of incarceration, I have lived nearly 15 years labeled as a rogue trader
and often as a pariah by some sectors of the Japanese community for
assisting the U.S. authorities in prosecuting Daiwa.
For many years, I tried to put those painful 20 years behind me. But in
early 2014, an old friend from Wall Street contacted me and convinced me
that I should tell my story in English as he felt there are so many valuable
lessons to be told. I was reluctant at first as every time I talked about those
facilitating factors of my activity, I was criticized for either not being
remorseful enough or shifting the blame. To this, he said, “Tosh, people
shift the blame on others to escape punishment. Not only have you accepted
your responsibility, but you have already been severely punished. Tell your
story as it is. People should hear it.”
In writing this book, I tried to present objectively the causality of the
events; how I got myself in this mess, how it continued, and how I ended up
losing $1.1 billion.
South African risk management specialist JC Bruce writes in his book
“The Rogue Myth” that “The ‘rogue’ phenomena could probably be
attributed to a combination of sensationalism and blame shifting.” He has
done perhaps the most extensive research on this subject that I know of.
 My goal in writing this book is to dispel the prevailing myths about
“rogue traders” so that we can evaluate the cause and the effect of rogue
incidents more objectively. With a clear understanding of the problem, are
we able to prevent further occurrences.
 Part 1

July 1995
 Chapter 1

Confession
On July 14, 1995, sitting in my office on the 31st floor of the World
Financial Center, I looked at where the Hudson spills into Upper New York
Bay. It was an exceptionally clear day for this time of year, when a thick
layer of smog and humidity from New Jersey factories usually hung in the
air like an old blanket.
The sky was endlessly blue, with billowy clouds floating here and there.
In the distance, I could see the Verrazano Narrows Bridge protruding out of
the hills of New Jersey, glistening like an illustration in a fairy tale.
Nevertheless, because of the intense pressure I had been under for several
years, it had been a while since I had appreciated this magnificent
panorama.
I had just informed a dozen bond dealers on Wall Street that I was
resigning as a long bond trader, so that my absence would not spark
speculation that something was amiss at Daiwa, where I worked.
Wall Street is a huge rumor mill in which any irregularity is exploited
for profit. For some time I had been one of its most active bond traders, but
the time had finally arrived to stop the charade. Twelve years after a bad
trade had set me back $70,000, my futile attempts to recoup the money had
resulted in a loss of $1.1 billion to my employer, Daiwa Bank.
Usually, cases of corporate impropriety end when either the scheme is
discovered by someone or the aggregate amount of the loss becomes too
large to hide.
In theory, the loss must appear somewhere on the balance sheet of a
financial institution, if not yours, as long as the position you are carrying is
properly marked-to-market. This was not so in my case. Though I could
have continued my unauthorized trading a while longer to recover at least
part of what I had lost, I made a conscious choice to end it. ‘But why then?’
you may ask. A confluence of several unique situations had dictated my
decision.
Firstly, I had come very close to confessing my impropriety six years
before; however, not all of the elements were there to pull the trigger.
Although the loss was about $600 million, given the exchange rate of 150
yen to the dollar, the loss to Daiwa headquarters in Japan was about 90
billion yen.
Now, at the exchange rate of 81, the $1.1 billion loss was still about 90
billion yen. As the dollar/yen exchange rate had never been this low, it
could have started to go back up at any time, in which case the loss to the
bank would increase without my losing any more money. (Indeed, the dollar
rose to 147 in the following 3 years.)
Secondly, only five months before, an earthquake of magnitude 7.2 had
struck my hometown of Kobe, Japan. The economic downturn following
the earthquake had caused the Nikkei stock index to tank.
Only a few days later, news of a Barings Bank trader at its Singapore
office losing $900 million hit the headlines. In sheer desperation and fear he
chose to flee the country. He vanished without notifying anyone of his
losses, and, more importantly, what had to be done for his bank to control
the damage. Due to large open positions he left, the bank was left bleeding.
By the time all wounds were closed, it incurred liabilities totaling $1.4
billion, which were well beyond its capital and reserve base.
When I heard of this, I knew what I had to do. I had already caused
significant damage to the bank and felt I had to minimize any further loss.
Thirdly, I had two teenage sons whom I loved and to me nothing was
more important than keeping their respect. For years, I had been afraid to
come forward, partly because I didn’t want to disappoint them as a father.
As they turned seventeen and eighteen, I felt they were emotionally ready to
accept the truth about their father and make their own judgment.
To end this charade, I had several alternatives. To avoid the pain of
facing reality, I could have easily escaped to a place where no one would
find me. With access to an unlimited amount of funds, I would have had no
problem in securing my safety and comfort in a far-away land.
However, running away was not the answer, nor was continuing until
someone discovered my impropriety. These might be less painful solutions
personally, and I can see how some would take this path. However, my
mind was set in regaining my dignity for my loved ones. I had caused
enough damage, and I wanted to do everything in my power to limit further
hemorrhaging for the bank. The last 12 years of my life had been filled with
lies while I had been craving an honest life. Here was my chance.
 In order to prevent further losses, there were three types of risks that I
needed to control. First were the large open positions. Think of them as a
large open wound. If it became public information, the bank would be at the
mercy of opportunistic traders who would gladly run the market against
such positions.
The second risk was a run on deposits. Since a bank’s business depends
on its credibility, a revelation of this sort of scandal could trigger a rush of
withdrawals by its depositors, which could technically force the bank to
default. In order to protect Daiwa from this risk, I needed to make sure that
the senior management had the complete details of the loss immediately, so
that they could alleviate any fear among its depositors.
The third risk that I felt I needed to control was credit risk. As many of
the bank’s assets were funded by short-term loans from other banks (called
‘inter-bank loans’), any perception of impending trouble would raise the
interbank loan rate, which could turn most of the thin margin loans into a
negative carry, meaning the borrowing rate exceeds the lending rate.
In the credit market, whenever a fear of unknown risk enters the
equation, the markets demand a risk premium. Therefore, to alleviate this
fear, especially when that fear is warranted, financial institutions need to
assure the public that the situation is under control and their safety and
soundness remain intact.
Perhaps my concern for the fate of the bank was not typical behavior for
someone who had committed such an impropriety. It was later described as
“misplaced loyalty.” Perhaps that is how it looked to a lay person but the
potential risk the bank was facing was unfathomable because I knew all the
subterfuges, and what most of the consequences would be when the loss
was finally revealed.
As this story unfolds, you will see that I could not have possibly
concealed this astronomical loss for so long and continued trading as one of
the major players in the government bond market, if it were not for the
blatant failure of the system.
My revelation was about to expose many cracks in the system which
existed on both sides of the Pacific. Those who were in a position to detect
any irregularity included the Ministry of Finance (the Japanese Treasury
Department), the Bank of Japan (Japan’s central bank), the Federal Reserve
Bank, the New York State Banking Department, the accounting firms of
Peat Marwick, Ernst & Young, Ota-Showa, the New York law firms of
Davis Polk, Sullivan and Cromwell, and more than a dozen Wall Street
dealers, such as Cantor Fitzgerald, as well as many employees of Daiwa
Bank and its senior management, which had all knowingly or unknowingly
played a role in the deception.
While my resolve to come clean was rock solid, I was overwhelmed by
the fear of admitting that I was not the person I appeared to be.
For twelve years, I had worn the cap of a successful bank manager as
well as the cap of a super-trader. My family, kids, friends, co-workers,
bosses, neighbors, lawyer, real estate agent, and even my barber thought I
was a successful Japanese banker.
Now, I had to reveal that it was all a lie, a trick done with mirrors. In an
effort to preserve our self-image, most of us tend to withhold certain
information, or even lie a little. My case went well beyond being
embarrassed or disappointed. I would have to admit publicly that I was a
complete fake who had deliberately misled those who trusted and counted
on me the most.
After revealing this ugly truth, I would be lucky to have one friend left
in the entire world. The possibility of losing my loved ones and friends felt
like a death sentence. But what had been done was done, and I was ready to
accept the consequences.
To let the senior management know exactly what had happened, I
prepared a 30-page letter addressed to Mr. Fujita, the CEO, detailing
everything. To make certain he read my letter himself, I needed to prepare
the envelope in such way that no one else would open it, not even his
secretary. I wrote on the envelope in three places ‘Personal and
Confidential,’ and put it inside another envelope marked ‘Personal.’ My
mail clerk told me it would arrive in four days, on July 21. That night, I
read all 30 pages numerous times to make sure there were no errors,
especially with the numbers I had quoted.
Early in the morning of July 17, I confirmed that a carrier from Federal
Express would stop at our office at 4:00 p.m. The mail clerk asked me to
give him my material so he could prepare the FedEx envelope. When I told
him I would do it myself, he looked puzzled as such a simple administrative
task was part of his job. But I could not take the risk. The letter had to get
into the hands of Mr. Fujita and no one else. There was no room for error.
Looking at a large ocean liner cutting through the shining water in the
Upper New York Bay, I knew what I was about to do could be very risky as
far as my legal culpability was concerned.
Nevertheless, after much deliberation, I decided to go ahead. I didn’t
think the bank would face any legal problems. Having worked in the
Japanese banking industry for 20 years, it was inconceivable for a bank to
be brought up on criminal charges. Despite the modern government Japan
had modeled on America in the process of rebuilding the county after World
War II, the Japanese justice system had never been given proper emphasis.
For example, the ratio of lawyers to citizens was 1 to 500 in the United
States, versus 1 to 10,000 in Japan, while the number of judges was 1 in
8,000 in the U.S, versus 1 in 60,000 back in Japan.
This was not because Japan was less democratic, but because its society
was built on more than 2,000 years of culture and tradition. The average
person in Japan would have no need to ever hire a lawyer in his or her
lifetime. But in the USA, people are used to demanding their entitlements,
and any person will hire a lawyer to defend his or her rights if it becomes
necessary. Ultimately, while the law rules American society, tradition rules
Japanese society.
In my letter (written in Japanese), in addition to the amount of the loss
and the explanation of how I was able to conceal it for so long, I needed to
assure Mr. Fujita that he had all the time he needed to determine the course
of action. I told him that no one else had any knowledge about it and until
they were ready to disclose it, all would be business as usual.
Also, I speculated on the chain of events that might unfold and the
possible repercussions, in the event that this information accidentally got
out prematurely. I also assured him that all positions were closed and that I
was prepared to do anything to prevent further damage.
At 4:00 p.m., the mail clerk informed me by phone that the FedEx
messenger was at the window. From my desk drawer, I took out the
envelope containing the letter.
Looking at it, I said to myself, “This is it.” As I got up, a sudden desire
to hold off mailing it suddenly struck me but was quickly brushed away by
my resolve to end the game. I walked over to the mailroom by the rear
entrance and peeked out the window to see if the messenger seemed
‘qualified’ enough to take it. Although he looked quite young, I handed it to
him with both hands.
The moment I let it go, I felt a wave of dizziness overcoming me. My
chest heaved, and I had to consciously instigate each breath. The secret I
had kept for twelve agonizing years was finally out. It was out!
The messenger took the envelope with one hand and threw it in his large
canvas sack with fifty or so other pieces of mail. He handled it in such a
nonchalant manner, having no idea what was inside.
When the messenger disappeared into the elevator, I knew it was too
late to change my mind. I had played my last card in the futile quest to
recover my loss, and now it was over. I spent the next few days rearranging
the contents of ten or so cardboard boxes full of confirmations, statements,
and books that could be used to verify the loss. Although the die had been
cast, until early in the morning of July 22, I would be free to relax.
Being in the ‘eye of a storm’ made me giddy. I felt both despair and
relief now that the end was upon me. Though it seemed to be the natural
consequence I’d anticipated for years, I had to accept my complete defeat.
Not only for the money I had lost, but also for the twelve years of my life I
had wasted. Living in deceit and constant fear, my life had become an
unimaginable torment that I would have ended long before if it weren’t for
the love of my sons.
“Dear Mr. Fujita,” my letter began. “I am Toshihide Iguchi of the New
York Branch. What’s written here is my honest confession. When I consider
the extent of harm this incident may bring to the bank, I curse the
extraordinary situation in which an employee can cause such enormous
damage, and regret that I happened to be in the middle of it.” This was a
version of the document I had begun eight years before when pressure from
my wife’s divorce attorney led me to contemplate suicide. A year later, I
had decided to present it to my superior to end the deception, but he
suffered an unexpected heart attack, and I mistakenly took that as a sign my
luck would improve, so I held on. I had continued to update it and had
polished it repeatedly in the previous month.
“Let me first bring the facts to your attention,” it continued. “I have
amassed a loss of approximately $1.1 billion by trading U.S. Treasury
securities without authorization. I covered it by selling Treasury Bonds and
Notes that we were holding for our clients. The reason I decided to report
this terrible impropriety directly to you is to prevent the bank from suffering
further losses, which could happen if this information fell into the hands of
an outsider before the bank took steps to protect itself. At present, there is
no one other than myself who knows about this matter….” This was
partially untrue. There were five people who knew a portion of my secret:
my divorce lawyer, my ex-wife, a psychotherapist, and two colleagues who
joined me in 1989, all of whom would not disclose what they knew for
either professional or personal reasons.
After sending this, I intend to continue reporting to work until you
instruct me to do otherwise, because I see the priority now is to do
everything in my power to keep this matter from being prematurely
revealed. There is no chance anyone will discover any irregularities as long
as I am at my job, because I have kept this secret for twelve years.” I
needed to assure him of this so he would be able to clearly and calmly
consider what to do without having to worry about facing the press the next
morning. I also needed him to know that I was not in any way blackmailing
him, but was on his side.
“If this problem becomes known to the U.S. regulatory authorities, our
U.S. operation will be jeopardized due to total lack of internal control and
an auditing function, as well as our 1993 misrepresentation to the Federal
Reserve Bank with respect to our trading operation. Furthermore, the
Ministry of Finance will also receive strong criticism for its lax oversight,
especially after sending an auditing team to New York for a spot
examination, which was recommended by the Federal Reserve Bank.
Letting the same employee be in charge of both the Custody Department,
which holds billions of dollars of customer securities, and the trading
operation of the bank’s proprietary account, is bound to cast a damaging
light on our integrity as a trust bank. Realizing that the implication of this
scandal does not stop at our door, particularly at a time when the Japanese
banking industry is faced with credibility issues, I debated whether or not I
should continue hiding this secret awhile longer. However, should it be
discovered by outsiders, such as bank examiners or independent auditors, it
might threaten the existence of our bank. Therefore, I decided to confess to
you in confidence.”
In a situation like this, a CEO’s first instinct is to control the damage. To
do this, he needs to know its exact extent and location. At this point I knew
all of the potential negative impact of this news—besides the obvious loss
of $1.1 billion—better than anyone.
“I realize that the least I can do now is to keep this secret from leaking
out before both the bank and the Japanese regulatory authorities take the
necessary steps. Although there is nothing I can do to recoup the loss, I feel
I can make my final contribution to the bank by preventing the situation
from getting any worse.”
I finally mailed my confession letter to the CEO of Daiwa Bank. I
expected a phone call from ‘somebody,’ either at home or at the office the
first thing the morning of the 22nd. By assuring Mr. Fujita I would sit tight
and wait for his instructions, I was certain he would call me because his
first inclination would be to confirm that the letter had indeed come from
me. On the evening of July 21, I went to bed around 11:00 p.m., with little
expectation of being able to sleep. According to FedEx, the envelope would
be in the hands of the recipient around 2:00 p.m. Japan time, or 3:00 a.m.
EST. So it was conceivable that my phone would ring by 4:00 a.m.
Waiting for a response, I was a nervous wreck because I had no idea
how Mr. Fujita would react. But one way or another, at least the debilitating
anguish and shame that had crushed me for twelve years was about to come
to an end.
There were no phone calls from the bank over the weekend. If Mr.
Fujita hadn’t read my letter on Friday, he was certain to see it on his desk
this morning. In fact, right at that moment, I could almost see his grim face
buried in my confession.
Unable to fight off the anxiety, I decided to send another letter, with a
copy of the original one attached. Possibly someone else had opened the
first envelope, and it had fallen into the wrong hands. This was why I hadn’t
confessed to my immediate boss, the New York branch manager. If I let the
envelope go up through the ranks of the bank, who knew how long it would
take to get to Mr. Fujita. Middle management people tended to sit on
negative reports that might be detrimental to their future.
For this reason, by the time the bank’s president learns of a problem, it
is often too late. Only I knew the complete extent of the problem. The web
of deception I had created was so intricate that only one man in the
organization would understand immediately: not the CEO, but one of the
two deputy CEOs, Kenji Yasui. I expected Mr. Fujita to consult with Yasui
immediately.
Early Monday, I sent Mr. Fujita a second letter, expressing my concern
that he may not have received the first. I attached a copy of the first and
added my opinion of how this incident could have been prevented in the
first place and how it could have been discovered at a much earlier stage. I
concluded by saying, “There certainly were numerous deficiencies in the
branch’s internal controls. However, I take full responsibility for having
engaged in unauthorized trading to recoup my original loss. I am prepared
to accept the consequences, but I believe it is important to take this scandal
out of the United States. As I stated in my first letter, if this incident is
revealed to the U.S. regulatory agencies, it would be very difficult for us to
continue our operation here. Moreover, the Japanese banking regulators will
also lose face for not auditing us properly, and that could affect the
relationship between the United States and Japan.”
I had even offered a plan: “To make this incident our own domestic
problem, all we have to do is buy back the missing U.S. Treasury Bonds.
No one has any knowledge of this problem, and if those securities are
bought back, not even internal auditors will notice any irregularities.
Though I am prepared to accept whatever decision you render, I am
committed to doing whatever it takes to move this incident out of the
United States. I am enclosing a procedure for verifying the losses when the
time comes.”
On Monday, I was able to think a little more clearly than the previous
Friday. After reading my letter, I felt Fujita would probably call Yasui in
Tokyo, the deputy CEO in charge of international operations. He would fax
it to him, and they’d talk again in an hour or so. I couldn’t predict what
would happen after that, but felt one of them and probably both would call
me to confirm the letter’s authenticity. Before I went to sleep, I made sure
the phone was working properly and the volume was at max. Regardless of
what Fujita decided to do, I believed something would happen soon to give
me a good idea of where I stood.
When the phone finally rang, I had just fallen asleep. It sounded so loud
that I jumped out of bed. The clock indicated 6:32 a.m. There was no
question who was on the other end of the line: someone from Daiwa Bank
in Japan. I picked up the receiver. “Hello, this is Iguchi,” I said—in
Japanese so they would know it was me.
“Oh, Iguchi-kun2 . This is Yasui from Tokyo. Sorry to have awakened
you. We waited until now so we wouldn’t bother you in the middle of the
night. I’ve read the letter you sent to Mr. Fujita.
“Kun” is a more familiar form of address in Japanese and less formal
than Mr; used for males. I understand clearly what has transpired, thanks
for the details you provided.”
 I was soothed by his empathetic tone. “I am very sorry for causing such
a problem,” I replied, my voice a little shaky.
“Well, it’s over. I can see from your letter how hard it has been for you,
but forget the past and let’s figure out what we should do.”
“I will do anything I can to help the bank,” I said.
“As you said, the most important thing is to keep this matter in strict
confidence. It is a very large amount of money. Right now, only five people,
including Mr. Kaiho (Deputy CEO), know about it. Mr. Yamaji (the head of
the International Division) and Mr. Moto (the head of Securities
Investment) are here with me. So, what do you think we should do?”
He used the same tone he would if he were asking me about an
investment, which was tremendously reassuring. “We need to buy back the
Treasury Bonds that are missing from the clients’ accounts,” I replied in a
modest but firm tone. “Once that’s done, the New York Branch will be
made whole, and we can take care of this problem in Japan.”
“A billion dollars’ worth,” he said. “Where do we get the money?”
I was taken aback by this question as I wasn’t expecting such a
fundamental question, so I needed to rack my brain to come up with a
decent suggestion. “As a proprietary investment of bank headquarters, we
should fund the money in Japan and swap it into dollars,” I suggested,
feeling very strange about my role. “This needs to be done quickly because
the bank is exposed to foreign exchange risk as we speak,” which was in
fact the most important thing.
“Funding it in yen…It is quite difficult, but…let’s continue our dialogue
later; let me give this phone to Mr. Yamaji.”
“Hello, this is Yamaji.”
“Mr. Yamaji, I am really sorry to put you through this,” I said. I
regretted not having a glass of water beside me.
“...well, as Mr. Yasui said, there’s no use crying over spilled milk. We
will need your assistance from here on.”
“I am committed to help the bank, sir.”
“Good. I will arrive in New York on Thursday, so meet me at the hotel
and show me how I can verify the loss.” Yamaji had been the New York
branch manager from 1992 until only a month ago, and Yasui had been the
manager from 1987 to 1990.
“Yes, sir.”
 “I know you are under a lot of pressure, but we all are now. Mr. Fujita
has delegated his authority to me to handle this problem, so I hope you will
stick by us.” Yasui sounded very much in sync with me.
“Absolutely, sir. Again, I am very sorry to have caused this calamity.”
When I hung up the phone, the overwhelming sensation of relief filled
every cells of my body. I lay back down on the bed with my eyes wide
open, trying to recall every word that had been said.
My mind was so elated that I could hardly remember the conversation.
All I could recall was that they seemed to be composed and trying to find a
solution. They had asked me for my input rather than turning me in to the
authorities. For twelve years, I’d been chained to this ugly secret that
tormented me every waking moment— and quite often in my sleep. Now
that I had come clean, I no longer had to fear my secret being uncovered
while I was out of the office.
As it was not possible to be in the office all the time to keep an eye on
everything, even during my vacation, I had to be near a phone 24-7 to be
able to explain if anyone detected a questionable entry. Every time the
phone rang, my heart used to race but not anymore.
As I walked out of the house, the whole world looked different. The air
was clear, and everything looked vivid. My world had been monochromatic
for twelve years. All my joys had been muted and my sorrows exaggerated.
I got off the train at the Hoboken terminal and walked to the ferry which
takes me to the concourse of the World Financial Center. When the ferry
approached lower Manhattan, I had always avoided looking at the window
of my office, where my abominable secret was hidden. But on this day, the
first in the rest of my new life, it was shimmering in a different shade of
blue-green, and I could look at it void of any sinking feeling.
As soon as I arrived at the office, I called the traders in the midtown
office and told them not to trade any bonds until further notice. This was
Yamaji’s instruction. As I expected, the traders wanted to know why. Since
the traders’ job is to trade, if he can’t, he has no reason to be there. I thought
this was poor judgment on the part of Yamaji. Our regular trading operation
had nothing to do with my unauthorized trading.
That evening, I received a call from Yamaji. Because no one at the New
York branch knew anything about this, he asked me to reserve a room at the
Park Lane Hotel on Central Park South. This was to be a clandestine trip,
and he had to make sure no one recognized him. After all, he had spent
more than four years in New York as the head of our North American
operation. The Park Lane was a good choice because it was inconspicuous
and few Japanese businessmen used it.
As instructed by Yamaji, I went to work every day as if everything was
normal and prepared documents to verify the loss. There must have been
more than 30,000 confirmations dating back to 1983. I had one Japanese
officer as my deputy and fifteen operations clerks working for me. Some of
them had been with me for more than ten years and had unknowingly been
processing my unauthorized trades.
On July 27, I received a call from Yamaji telling me not to pick him up
at the airport after all because he had told two more people in New York
about the problem: the general manager of the New York Branch, Tsuda,
and the head of Daiwa Trust, Kitora. It was a reasonable move to bring
them in because they were the two heads of Daiwa’s New York operation. I
was told to meet them at 5:00 p.m. on July 28 at the hotel. At this meeting I
hoped to find out what the bank was going to do and what action I should
take.
Carrying all the documents I had prepared in the last three days, I left
the office at 4:00 p.m., walked over the bridge to the World Trade Center
concourse, and elbowed my way through a crowd of tourists and workers
heading home.
When I reached the subway station at the northeast corner, the platform
was packed with people. Two trains were stationary, with their doors open.
No one seemed to know the reason for the delay, but I couldn’t be late for
this meeting. I ran alongside the train inside the yellow line, hoping to find
a small niche in the crowd. As I was about to give up, a man recognized my
desperation and reached out, pulling me into a small space at his side.
In twenty minutes, I arrived at the 53rd Street station. I started to walk
the ten blocks to the hotel. There were crowds everywhere, mostly tourists.
With the U.S. dollar at a historic low, everything on Fifth Avenue was a
bargain. For that matter, everything in the U.S. was a bargain.
When I turned at the Plaza Hotel, it dawned on me that this was the first
time I would meet face to face with someone who knew my secret. It was
not as hard talking about it on the phone since I didn’t have to see my
interlocutor’s expressions. Now it would be different. Being one of the most
valuable employees in New York, I had received high evaluations and
constant admiration from both Yamaji and Tsuda. And I had a lot of respect
for them: They were both good men. Now I would witness disgust in their
eyes. I simply didn’t know how to apologize for the years of deception.
When I reached the hotel, I stopped to mop my brow before going in. I was
nervous.
I knocked lightly on the door. When Yamaji appeared from behind the
door and said, “Oh, please come in.” I looked at him instead of walking in,
bowed deeply, and apologized, “I am truly sorry for causing this problem.”
“Don’t worry about it, come in.” He spoke casually and led me to a
chair by the window. Pulling a cigarette from a pack on the table, he said,
“I’ve been smoking a little too much lately.” I apologized again for that. To
my surprise, I didn’t see the disdain I expected when I looked in his eyes. A
few minutes later, Tsuda and Kitora arrived, flushed from having walked
from 53rd Street. I apologized to them in the same manner. Surprisingly, I
didn’t find any contempt in their eyes, either. Tsuda assured me, “From now
on, we are in this together. Your secret is at the corporate level, so don’t
hold anything back and be honest about everything, okay?”
“Certainly, that is exactly how I would proceed,” I replied, genuinely
overwhelmed by this friendliness.
When everybody was seated, Yamaji said he was going to ask some
questions to clarify some areas. He seemed to have a list.
“Why did you decide to come forward now?”
“Considering the difficult situation banks are in now, I thought that if I
missed this opportunity, it could be disastrous for us.”
Surprised I didn’t have any other reason, he moved on: “Are all our
positions closed?”
“Yes, everything was cleaned up before I made my confession.”
“Could any of the dealers suspect something?” A little concern showed
on his face. The other two looked at me intently as well.
“No, I have been preparing for this by reducing the trading volume for
some time. I said I was looking for a better opportunity. None of them know
anything about this.”
“OK, that’s all I wanted to know for now. We’ll meet again tomorrow. I
would like you to show me how I can verify the loss.”
The other two asked how I had managed to trade in such large amounts,
although they didn’t seem particularly surprised. When we came to a point
in which nothing further was forthcoming, I asked the question that was
most important to me: “What should I do now? I mean, am I fired?”
 “Oh, no. We are planning to report this incident to the Ministry of
Finance after our semiannual earning report in November. We would like to
announce this loss sometime after that. It can be written off at the end of
next March. Can you continue hiding it until then?”
“I…I think so,” I muttered.
I couldn’t believe my ears! I had to continue the charade for four more
months! At least I would be doing it with the blessing of, and under
instruction from the senior management.
“We would like to take care of this quietly so no one will be hurt,”
Yamaji said with a solemn expression. By this I thought he meant no one
should lose his job over this, including himself. He asked, “By the way, can
you work in Japan?”
“You mean at some affiliate?”
“Yes, not at the bank.” I considered it, but told him it would be difficult
because I had two sons in America. “I see, well, we can talk about this
later,” he said, nodding to himself and lighting another cigarette.
“Iguchi-kun, do you have a girlfriend or a fiancé?” Tsuda asked out of
the blue. I thought of Akemi, but elected not to mention her: “No. Why?”
“Oh, I am not being nosy. I was concerned you might have confided in
someone you were close to.”
“You don’t need to worry. I’ve kept this matter to myself for twelve
years.”
He smiled in acknowledgment and said, “That’s very good. I believe
you, even though I know how difficult it must have been.”
“In any case, if there is anything bothering you, let us know,” Kitora
assured me. “Don’t keep it to yourself. Remember, now we are all in this
together.” After being tortured by anxiety and guilt, after feeling cut off and
all alone for so long, his comforting voice sounded as if it were coming
down from heaven.
“The problem now is the interest payment due on Monday,” Yamaji
summarized.
“Yes, our clients will be expecting to receive interest on the securities
we’re supposed to be holding for them.” Now that they know about this, I
expected them to let me use the bank’s ‘suspense payment account,’ but
Tsuda said, “Do what you’ve been doing, selling more securities to raise the
money, okay?” I was shocked that they wanted me to continue selling our
customers’ securities, especially since there were alternatives. That meant
either they were very careful to avoid having anyone suspect anything out
of the ordinary or they simply had no other ideas.
After the meeting was adjourned, I left first. We would meet again the
next afternoon. On the way home, I tried to assess the situation by putting
together all that had been said. So far, it seemed the bank was looking for a
way to get out of this mess without making it worse. As Yamaji said, they
didn’t want anyone hurt. The million-dollar or rather the billion-dollar
question was how could they announce the loss and expect no one to be
hurt? It was impossible to imagine. When they covered up the loss at Daiwa
Trust, no one had been hurt because it was never reported publicly. It had
been covered up perfectly, without any trace. But this time, no one in their
right mind could think we would be able to cover up a billion-dollar hole.
We would need more creative accountancy than I could imagine, unless
all those who would audit the bank were in on the situation and willing to
be part of an immense conspiracy.
The next morning, I went to the office to prepare more documents
detailing how I had been able to buy billions of dollars of bonds with no
money and without anyone at the bank noticing and how I was able to
receive and pay millions from my trades, day in and day out, without
raising any questions. I had to drive into the city because there was no
commuter train on the weekend. After a light lunch at a pizza parlor in the
World Trade Center, I drove up to the hotel and parked in a nearby parking
place that preyed on tourists by charging $28 for three hours. We started the
session immediately. Yamaji was flabbergasted when I showed him how it
was possible to hide a billion-dollar hole.
When we were finally done, Yamaji asked if I still had the floppy disk
in which my confession had been saved. He wanted me to destroy it so no
record would exist. I acknowledged having it, but I had no intention of
destroying it. I wondered what they were planning. Two possibilities came
to mind: Perhaps they knew of some secret way to make the entire matter
disappear so no one would ever have to take the blame. Or perhaps they
wanted to create a situation in which they could take the credit for
uncovering a major crime, and I would face even more blame than I had
anticipated.
I drove straight home. My mind was not as clear as I needed it to be.
Bothered by inconsistencies in Yamaji’s plan, I tried to think it through. The
bank, or at least the senior management, said they wanted to solve the
problem without anyone getting hurt, meaning no one would be held
responsible.
I couldn’t imagine how such a thing could be achieved. If the loss and
all the deception surrounding it were to be disclosed, Fujita, the CEO;
Yasui, the deputy CEO in charge of international operations; Yamaji, the
managing director and head of the International Division; and Tsuda, the
Director and General Manager of the New York Branch, would all have to
be removed from their positions. Kaiho, the other Deputy CEO, would not
be affected, because he had not been involved in any international business.
So how did they plan to escape the culpability when the loss was announced
in November? It didn’t add up.
The only way for them to come out of this unscathed would be to bury
the loss altogether. To do that, they would need the government’s blessing.
Not the executive branch or the judicial branch, but the powerful Ministry
of Finance (MOF), which had guided Japan from the barren times post-
World War II, forty-five years earlier to becoming the world’s second
strongest economy. This miracle was achieved because they were able to
nationalize the banking industry in the name of rebuilding the country. So it
wouldn’t be difficult for them to make any adjustment they felt was
necessary.
I asked myself what would motivate those in power to expend their
influence to assist Daiwa. There was only one answer: to cover their own
ass, just as the CEO of Daiwa was trying to do. After all, hard-earned power
would count for nothing if their positions were lost. This didn’t bother me,
unless they intended to have their victory dance on my coffin.
 Chapter 2

Conspiracy
In 1989, when Yagi and Araki, the two junior traders who traded under my
supervision, racked up losses beyond the limit, I agreed to hide their losses
until they could recoup them. But just as my loss had snowballed, so had
theirs, and by 1990, it reached nearly $350 million. They didn’t know I had
already lost several hundred million dollars myself.
When it became obvious their loss could not be recovered, I decided to
take the rap all by myself. There was no sense getting three of us in trouble
if only one had to be sacrificed. The cost of being branded with any sort of
impropriety was enormous.
Japanese businessmen were hired for life, and their salary increased as
they climbed the seniority ladder. It was not essential for them to exhibit
extraordinary levels of skill or outstanding leadership. As long as they put
in long hours without making major errors, they would be promoted every
so many years. Working at an overseas branch would add a feather to their
cap. Since it required speaking English, some of the most highly-educated
employees were sent on this mission. Araki and Yagi were the cream of the
crop. When they were transferred back to Japan, I told them I would take
responsibility if their loss came to light. Since my own was more than twice
as great, I figured that whatever happened, if I confessed or was caught,
adding theirs losses to mine wouldn’t make it significantly worse.
They didn’t know anything about my decision to confess, so I called
each of them and relayed what had happened. I told them not to worry.
They sounded concerned but appreciative.
The following Monday, Tsuda came to my office and told me we were
going to verify the loss. He decided to involve my deputy who had been
working as the manager of the custody department because no one from the
New York branch was supposed to know that he was visiting the downtown
office after business hours.
As contradictory as it may seem, to seal a secret, it is often necessary to
enlarge the circle of confidants. So we began verifying a loss going back
twelve years. Specifically, the bank needed to know the monthly loss
amounts since 1983, which required assembling corresponding bank
statements showing the amount of deficit.
We worked every day from 6:00 p.m. to midnight. I was impressed with
Tsuda’s dedication. After all, he was a director of a major international
banking organization and the head of its North American operation and did
not have to do this sort of book-keeping work. We labored non-stop,
reconciling number after number.
One day, out of the blue, Tsuda asked me if I knew how we could
transfer the loss to an offshore entity. What an irony! For twelve years, I
had been hiding this loss from them and now they were asking me how to
hide it from the world.
So, in effect, all I had done was to involve a few more people. Feeling
ambivalent, I told him I had no idea. I had hoped that they’d deal with this
loss in a way no further damage is brought on to the bank but concealing it
illegally as he implied was out of the question for it would defeat the
purpose of my bringing it to light.
After five days, we decided to take a half day off on Saturday. The work
was almost done. On August 5, I picked up my girlfriend, Akemi, at the
airport. She had been visiting her family in Japan for two weeks. It seemed
like I hadn’t seen her in ages. Although having her back in town was
wonderful, the prospect of losing her when she found out the truth,
dampened my enthusiasm. Naturally, she had no knowledge of my problem.
Heading back from the airport, she asked me if the audit I had mentioned on
the phone had been finished. I told her it would be another week.
On August 7, Tsuda told me to prepare a shorter version of my
confession letter containing only the facts about the loss and nothing else.
He informed me that the bank had decided to meet with the chief of the
banking department at the MOF to report the loss, and he felt I had included
too much irrelevant information in my original letter.
I was not happy with this, because if they wanted the MOF to
voluntarily take the initiative, then the MOF should have full disclosure,
both the good and the bad. I thought I went to the top but forgot that the real
top of Japanese financial institutions was the MOF!
It was much like talking to an attorney: One should disclose everything
so that an informed decision can be made. But I was not able to suggest this
because their ultimate goal of having the MOF come to their rescue had
never been openly discussed.
 Since what they were trying to do was inherently unethical, it would be
equally unethical for me to bring it up. For that matter, they would not be
able to openly ask the MOF to be their accomplice. It would have to be
done in a very subtle and implicit way.
The MOF was known to set its policy of disclosure arbitrarily. What
was ethically right did not necessarily mean it was right thing to do. If the
disclosure triggered a systemic reaction such as run on the bank and a
financial panic, it would be difficult to prevent thousands of people from
losing their jobs and many small businesses from going under.
The MOF would have to compromise its business ethics to do what was
morally right. It would have to choose the lesser of two evils. Choices are
often made based on extreme versions of the possible consequences. Since
no one knew exactly how the market would react, they had to take the
worst-case scenario to be safe. The negative effects of compromising
business ethics would be far less damaging if their projection turned out to
be excessive. (Who could predict that in 13 years its U.S. counterpart, the
U.S. Treasury Department, would be pursuing the exact same policy of “too
big to fail?”)
The MOF was also known to meddle with markets to achieve its desired
effects. For example, it had used taxpayer money to buy stocks to support
the stock market so banks, which collectively owned 25% of all Japanese
stocks, would not have to show a huge loss on their books. Over the years,
the MOF effectively ignored both business law and ethics in the name of
rebuilding Japan’s economy. Many of its decisions were in the category of
holding moral responsibility over ethical responsibility, but invariably, some
were driven by more selfish reasons, both political and personal. (This also
applies to the U.S. Treasury Department and the Fed today.)
In the list of priorities of Japanese corporations, the shareholders came
after the employees and the customers. The rationale was that if the
employees are treated well, they will keep the customers happy, and that
leads to higher profits, which will make the shareholders happy.
Consequently, the shareholders were not encouraged to challenge a
management decision, even if it seemed detrimental to the bottom line of
the company they collectively owned. It was understood that however
immoral, unethical, or downright illegal they might be, the decisions made
by the government and business leaders were for the good of the country.
This is the Japanese spirit.
 Everyone must have moral justification when violating ethical rules.
The loss of a billion dollars to a bank is theoretically the loss of a billion
dollars to its shareholders. When he is notified about this magnitude of the
loss, the CEO will ask himself what good it would do to tell the
shareholders. They would have nothing to gain and everything to lose if the
depositors pull out. Even if the bank escapes a major deposit exodus, it
would be chastised for not having had proper internal controls, and the
regulators would impose restrictions on its international business.
While he is thinking on behalf of the shareholders, he is also aware that
if this scandal is disclosed, he and several other senior managers would be
pressed to resign. When these ideas are sorted out, his course of action
becomes clear: He will advocate burying the scandal to protect not only the
shareholders but also the employees, the customers, and himself.
Had this loss been $100 million or so, they would have buried it on their
own, but after deliberation, they realized it was too risky to bury such an
elephant in their back yard. But the decision had come a little too soon,
given that Tsuda had been asking me if I knew how to transfer the loss to an
offshore entity.
There had to be another force at work. I sensed this because Tsuda had
continuously complained about a senior managing director who was in
charge of domestic business. Within the senior management of Daiwa, there
were two factions at odds, the Domestic and the International. The
International faction was led by Yasui, Yamaji, and Tsuda, while the
Domestic by Fujita and Kaiho.
Given the sheer number of employees in Japan who worked at handling
domestic banking services, the Domestic faction had more members. But
the International group carried more clout because it played such an
important role in presenting the bank to the world financial community. In
recent days, many decisions had been made to prioritize our international
agenda, which had engendered quiet frustration among the Domestic
faction.
Although Fujita was in the Domestic faction, as the CEO he was
responsible for the loss. Thus he shared the same problem as the
International members: a threat of losing his position. On the other hand,
Kaiho and other Domestic staff really had no personal risk at this point. As
a matter of fact, if all the Internationals were ousted along with Fujita,
Kaiho could start his own realm with no opposition. So there were clearly
two forces working, not against each other but with separate agendas.
After a few days, I learned the reason why the chief of the banking
department had told Fujita not to let this secret out until at least the end of
September. The failure of another large bank was about to be announced.
They must have felt that announcing two major scandals would be too
much of a shock to the already fragile financial system.
After we had verified the loss on a monthly basis, the headquarters
requested us to list all the individual trades. Since there were more than
30,000 confirmations, we needed to create a computer program. Despite the
number of capable programmers employed by the bank, Tsuda asked me to
hire one from the Yellow Pages for our covert activity. Once the program
was ready, I worked in the back room of my office all day entering
numbers. The clerks working for me began asking questions, so I told them
it was for an IRS audit.
On August 13, Tsuda left New York for Osaka for a top-level meeting.
Obviously, there was a disagreement between the Domestic and
International factions. I was afraid the Domestics, who saw no personal risk
in the consequences, were putting pressure on the Internationals to disclose
the loss at once.
The Domestics were unaware of the skeletons the Internationals had
stashed in their closet. Yasui had shot up the corporate ladder from a
London branch manager to the number two slot in a mere ten years. Along
the way, he’d buried several embarrassing problems and stepped on many
toes.
Tsuda came back from Japan on the 17th and told me that two more
Japanese members in New York, who had been in charge of compliance and
internal audits, had been notified and would join us in our task of
reconstructing the trades. Other than that, I sensed some hesitation on his
part to discuss what the bank intended to do in my presence. All of a
sudden, I felt I was outside the circle. The man who said, ‘We are all in this
together,’ was no longer there.
On the 19th, seven of us gathered in my office to work. However, the
new members from the compliance department were apparently not happy
with their roles, and the one from Tokyo was even less so.
What I feared most was developing, and there was nothing I could do to
stop it. A scandal this large could generate so much fear and greed that the
more people who were brought in, the harder it became to develop a
consensus. My effort to equip only a handful of senior managers with the
complete knowledge of what had happened seemed in jeopardy. Apparently
I overestimated the strength and leadership of Fujita.
I had funded the loss of $1.1 billion by secretly selling $600 million in
T-Notes which the New York branch owned, and also selling $377 million
in T-Notes which our pension trust department owned.
Shortly after Tsuda came back, the bank headquarters bought, for its
own account, $377 million worth of the same exact T-Notes that our
pension trust owned. And on the 31st, they bought $600 million worth of T-
Notes from the New York Branch.
Finally, all the missing securities belonged to the proprietary account of
the headquarters itself. The American books were made whole. The $1.1
billion hole had been moved to the bank’s own account in Japan, outside of
the United States, forty days after my confession.
While this was going on, someone suggested it was too conspicuous for
us to congregate in the back room of the downtown office every night, so
we decided to move our operation into Tsuda’s apartment on the Upper East
Side. We carried nearly seven cardboard boxes and a computer into a
luxurious East Side apartment, which the New York branch had purchased
for three million dollars five years before.
On August 31, the MOF announced the failure of the Kizu Credit Union
and the Hyogo Bank. There had been four major bank failures since June,
and a dozen more were waiting in the wings.
However, the biggest problem the MOF faced was that of seven home
loan banks. They had borrowed money from major commercial banks and
made risky real estate loans. They were thought to be saddled with nearly
$60 billion in losses. For the chief of the MOF’s banking division, who was
trying to establish some sort of a bailout package with public (taxpayer)
money, a disclosure of this sort would undermine his effort. The general
mood of the taxpayers was not sympathetic.
My already-hectic life was complicated by the arrival of my mother and
sister. Their visit had been planned since April and canceling it would have
required a very good reason. Although I did have a very good reason, I
could not tell them. Fortunately, Akemi agreed to take a few days off to
make sure they had a good time. But she mentioned to my mother that I
planned to quit Daiwa, which I’d forgotten to tell her. She was quite upset
on receiving this news because the Japanese tradition was to work at one
job for a lifetime.
To try and make it up to her, we all drove into Pennsylvania for a
shopping spree at a new outlet center in some converted warehouses. With
the dollar near an all-time low, my sister had a field day buying low-priced
famous brands. It was a pleasant respite from the increasing tensions.
By early September, only about one third of my trades had been
recorded. Those who were supposed to be helping me weren’t showing up
at Tsuda’s apartment anymore. Only the junior member from Tokyo and I
were working there. To speed up the process, the senior management
proposed sending another member to assist us. When I went back to work, I
could not believe the irony of hearing it was Araki whom the bank had
chosen to send to New York; he had worked with me as my junior trader in
New York from 1986 to 1990 and had been in the auditing department at
headquarters for several months. They figured he was perfect for the job as
he was knowledgeable about the T-Bond trading business.
Once he was told of my secret, I felt I had to apologize to him for not
having been forthright with him. When he joined me as a trader, I was
already hiding a $250 million loss. Although he himself covertly began
unauthorized trading of his own, it became my fault when I sanctioned it.
Then, having to help him drained my energy away from helping myself. It
turned out I couldn’t do either properly.
He arrived on September 5, and I met him at the apartment the next day.
I told him that I would do everything I could to keep his name out of this
mess, nevertheless, he was worried. Fortunately, he wasn’t upset with me
because he realized I couldn’t possibly have told him of my dire situation at
that time.
Now, three of us were working at the apartment. Every day, Tsuda left
for work at 7:30 a.m., and we came in at 8:00 a.m. and stayed until 9:00
p.m. The doorman must have wondered what was going on.
Sitting side by side with Araki brought forward the memory of our
three-billion-dollar bet in 1989. We were battling the market. Yagi, Araki,
and I seemed to be fighting all of Wall Street. Starting with a billion-dollar
short position, we kept adding to it as the market rallied higher. With our
eyes glued to the screen, we shook our heads each time the price moved up.
Day after day it rose relentlessly, as if it were rigged to blow us out of the
water. It was insane. For each point it moved, we lost another $30 million,
more than the New York branch made in a year. The torment was
excruciating, but to accept a $200 million loss would have been worse—or
so we thought. Every night, after the clerks had gone home, we sat in the
trading room staring at green lights on the screen, thinking one day this
would have to end.
On September 13, my family returned to Japan. Seeing them off at
Kennedy Airport, I told my mother to take care of herself and gave her a
big hug, thinking this might be the last time I saw her. I thanked God for
letting me fulfill my responsibility. Deep down, I wanted to tell her that her
son finally took the first step to his freedom. However, without knowing
what lay ahead of me, it would be too cruel to let her worry about what
might happen to me. Indeed, at this point, there were too many moving
parts.
Working with two guys at Tsuda’s apartment every day, I began sensing
something amiss. I wasn’t sure what, but Tsuda was visibly avoiding me.
Despite being in this apartment more than twelve hours a day, I seldom saw
him anymore. It had been a while since he had spoken to me. When he
came in, he would pull one of the others into another room to talk. Okay, I
thought, I was the one who caused this mess, so it’s all right if he doesn’t
want me to be part of the solution. Unfortunately, this reasoning didn’t
alleviate my sense of unease.
One night, three of us went to a nearby restaurant after work.
When the other guy disappeared into the restroom, Araki put on a
serious face and whispered, “It’s not good. I don’t know what they’re
thinking, but my guess is they’re panicking.” He looked as if he knew what
was going on, but couldn’t tell me.
“Don’t worry about it,” I said. “There’s no way they’d report this to the
U.S. authorities. They can’t. If they did, they’d be kicked out of the
country.” I was convinced I was right.
“I really appreciate your not having said anything about me,” he said
solemnly and bowed deeply to show his appreciation.
On the 19th, as we were getting in a cab to go home, an event took
place that increased my paranoia. Another cab pulled alongside, and its
driver asked ours where we were going. “Sixty-fifth and Park,” he replied. I
thought the drivers knew each other. Araki and his partner got off at their
hotel, and I told the driver to go to the Port Authority bus terminal on 41st
Street. The young driver hesitated, and turned around and asked, “Are you
being followed?”
“What?”
“See that cab over there?” he asked, pointing to the other side of the
intersection. “That’s the guy who asked me where we were going.”
Something told me I was being followed. “Can you pull up to the side
of the cab?” I asked. He pulled next to it, and I looked at the passenger.
Sitting deep into the seat and staring at me was a Caucasian guy in his 40s.
“Let’s go,” I urged my driver. “Fast, circle the block a couple of times.” My
driver sped away quickly. I couldn’t see the other cab anywhere out the
back window, but it bothered me. I wondered who the man had been and
what he was doing following me. My first thought was that someone from
Tsuda’s apartment building had hired a detective to see what we were up to,
but the way the man looked at me with cold, dead eyes made me feel there
was more to it.
When I got home, I called Araki at the hotel and told him about the
strange incident. He shook it off as some kind of coincidence. But I knew it
wasn’t; the man had definitely known who I was.
The next morning, instead of going to their hotel to pick them up, I went
to the apartment a half-hour early and walked around the building. If
someone had been alerted about our activity and was keeping an eye on us,
there would be a point man nearby, I reasoned.
I stood by the entrance to a building across Third Avenue and studied
each person on the street. Everyone looked suspicious. There was a man in
a dark turtleneck holding a cell phone to his ear near the entrance. Another
man in his 50s stood by his car on the side of the building. A woman in a
green dress by the flower shop restlessly walked up and down the block. An
older woman with a little dog was also standing around, but I thought she
couldn’t possibly be a private investigator. I stood there for at least forty-
five minutes until Araki and his partner showed up and walked into the
building. They weren’t aware of me. The people that I thought looked
suspicious didn’t pay any attention to them, so I went into the apartment on
their heels.
As soon as I got inside, I told them what I had been doing. They glanced
at each other and gave me a strange look. I will never forget their
expression. I felt like someone had poured cold water down my back. Their
response was wrong. They should have either shown a similar concern, or if
they thought I was being overly sensitive, they should have laughed and
told me not to worry. Instead, they offered a weak denial. “It must be some
kind of a mistake,” Araki said blandly, walking off to the kitchen.
Something was amiss, but I had no way of finding out what. We worked as
usual, but for some reason I felt that what we were doing was no longer
relevant.
That evening we went out to eat at a nearby restaurant. When Araki
went to the restroom, I said to his partner, “You know, Tsuda has been
avoiding me lately. I don’t know what he’s up to, but if the bank is going to
report this incident to the U.S. authorities, I hope he tells me in advance so I
can get a lawyer.” He knew I was pressing him to tell me something,
anything, but all I received was a subdued answer, “yeah…he should.”
September 22 was the last day of my ‘vacation.’ On Monday I was
supposed to go back to work at my office. Tsuda called in the afternoon and
asked us to wait at the apartment so he could tell us something about the
next phase. Any information was welcome at this point. At about 5:00 p.m.,
he came in with a junior member, Nakano, from the New York branch. He
had worked for me for two years as the head of the custody department and
was now in charge of human resources. He had just been told about this and
looked visibly nervous.
Tsuda said he was going to help us finish the work by the end of the
first half of the bank’s fiscal year. He asked if I could come up with a good
excuse not to go back to my office. I suggested he tell everyone I was on a
business trip to Japan. He agreed and said to all of us, “Why don’t you guys
take tomorrow off. My wife is returning from Japan, and I want to have
some privacy. Come back on Sunday.” I was pleased, because it would let
me spend the day with Akemi. My nerves were pushing me towards a
breakdown, and I badly needed to relax.
 Chapter 3

Arrest
September 23 was the day my life finally slipped over the edge. The day
itself unfolded in the normal way. While I lounged in bed, Akemi cleaned
the house, planning our future based on the incorrect information I had
given her. When I finally got up and had breakfast, I asked her if she
wanted to play a round of golf. She didn’t enjoy the game as much as I did,
but she always looked forward to outdoor activities with me. As I had been
so busy with work for the previous two months, she was happy that we had
this time together.
We had to wait less than ten minutes at the Sunset Valley Golf Course
and were joined for the game by two others. The air was clear and the
temperature perfect. I told myself to forget about everything and simply
enjoy myself. Akemi dropped out after nine holes and went home to prepare
lunch. When I finished playing, she returned to pick me up.
After lunch, I dozed on the couch while watching a samurai movie. In
the far corner of my consciousness, I heard a faint sound of the doorbell
which registered a tinge of anxiety as I wasn’t expecting anyone. I jumped
off the sofa and said “I’ll get it,” to Akemi, who was in the kitchen. Out of
the dining room window, I saw three cars in the driveway. I immediately
knew something was up. When I opened the door, three men in suits and a
plain-clothed woman were staring at me. One of them said, “Hi, I’m Special
Agent Ed Stroz of the FBI. Is Mr. Toshihide Iguchi at home?”
“I am Iguchi,” I replied, a knot of anxiety quickly forming.
With an incredulous look, because I appeared quite young for 44, he
asked, “Do you work for Daiwa Bank?”
“Yes, I do.”
It took them a few seconds to realize the man in front of them was who
they were looking for, and not some gray-haired executive. I’ve always
looked much younger than my years.
“Mr. Iguchi, if it’s okay, we’d like to speak to you about the letter you
sent to the president of Daiwa Bank.”
 I told them to come on in as if they were welcome guests. With the
knowledge of the letter, they obviously knew everything. I led them into the
living room. One woman went into the kitchen. I heard her talking to
Akemi. Two men identified themselves as Reid Figel, an Assistant U.S.
Attorney and Tim Dorch, an FBI Supervisor. They asked if I had written the
letter. I said yes.
Even at this point, I didn’t have any idea what was going on. All I was
thinking was to act normally as if nothing was wrong. I was well trained in
this department as I successfully cleared 179 audits during the 12 years.
Stroz asked if I would come with them to another place so we could talk
privately.
“We can talk here. It’s perfectly private,” I said. I felt I shouldn’t go
with them unless they had an arrest warrant. What I couldn’t figure out was,
if they knew I had written the letter, what was keeping them from arresting
me? Did they really just want to talk?
“It’s not private enough here. Is that your wife?” he asked, pointing to
the kitchen, where we could hear the voices of several women.
“No, she is my fiancé.”
“We really need complete privacy,” Figel firmly stated. “Please come
with us.”
“For how long?”
“You should be back by 9:00 p.m. at the latest.”
I thought about it. If I refused, they might arrest me, and I didn’t want to
escalate the situation. The last thing I needed was to be taken away in
handcuffs in front of Akemi. Since they promised to bring me back, I
agreed to go.
“OK, I’ll go with you,” I said. “But I want to be home no later than
10:00 p.m.” Little did I know that I would never see my house again.
“Yeah, we don’t see any problem,” they off-handedly replied.
I went into the kitchen and told Akemi I would be back later that night
and not to worry. She said, “Fine, I’ll have your dinner ready when you get
back home.” She looked a bit nervous but was making an effort not to show
it.
“I’ll follow you,” I said, starting to get into my car. But Stroz opened
the door of an old Buick and said, “Ah, no, it’ll be better if we drive you
over there.”
 I felt like saying, “If I’m coming back tonight, what difference does it
make?” But I obeyed his request. I didn’t want to appear belligerent.
The FBI manager, who hadn’t done anything but stare at me through his
wire-rimmed glasses, and the lynx-eyed Assistant U.S. Attorney (AUSA),
who seemed very hyped-up and nervous, sat in the front. I got in the back
with Stroz. We drove down 287 toward Morristown. It was tense until Stroz
asked about my sons.
“I understand you have custody of two boys.”
“I did, but not anymore,” I answered. “The older is in college and the
younger lives with his mother.” I told him I had tried to raise them but
couldn’t do it working thirteen hours a day.
“Which college does he go to?”
“Colby, in Maine.”
“My brother graduated from Colby,” the AUSA finally joined in. “It’s a
good school.”
“You must have had a rough time raising teenage boys with this trouble
at the bank,” Stroz said, sounding sincere.
“Yes. I suppose it would be tough enough under any circumstances, but
having this hanging over me made it impossible.”
“I can sympathize with you because I went through a similar situation
myself.” There was something reassuring about him that made me relax.
We got off at the Parsippany exit and drove into the parking area for
Embassy Suites. It was a pleasant setting: a large courtyard with tropical
plants alongside a stream, creating the effect of being in a botanical garden.
All the rooms faced this courtyard. The FBI had two adjoining suites. Stroz,
Figel, and I went into one. As soon as I sat down, Figel gave me a warning:
“Before we start, you should know that you don’t have to talk to us if you
don’t want to.”
I responded, “Yes, I know.” They also warned me that anything I said
here might be used against me in court, and I had a right to have my own
lawyer present. At this point I had no reason to hide anything because it was
all spelled out in my confession letter, besides I wasn’t arrested. I said,
“Let’s get going.” Figel looked a bit surprised but couldn’t hide his joy.
After all, he had a billion-dollar fraud case, and the main character was
willing to talk without a lawyer! It would have been a dream come true for
any prosecutor.
 I was asked to sign a paper waiving my rights. With my limited legal
knowledge, I figured I didn’t need a lawyer since I had not been arrested,
but I failed to follow my principle of not signing my name on a legal
document without an attorney reviewing it. So without the service of a
lawyer, I began a rap session with a Federal prosecutor and an FBI agent.
It was nearly 6:00 p.m. when we got down to business. The sun was
slowly moving toward the hills. My thoughts were with Akemi, who knew
nothing about my secret. I told myself, four more hours and I’ll be home;
I’ll have a lot to explain to her.
Figel jotted down everything I said on his yellow legal pad with a Mont
Blanc pen. He was a sharp-looking lawyer, but the victim of too much fast
food, perhaps. What impressed me was his remarkable ability to reconstruct
a complicated situation in his head from bits and pieces of information.
I knew how well he understood the intricacies of my scheme because
every question he asked was relevant. The only other time I met someone
similar when I was questioned by a litigator from Davis Polk two years
before about the trading operation in our downtown office. These guys
could detect flaws in any story, except mine. He was no match for me.
Perhaps because he felt the time was running out, Figel dominated the
inquisition. The way the legal system works here is that at first the FBI
investigates. Once it determines a Federal crime has been committed, it
reports to the U.S. Attorney’s office and obtains an arrest warrant. After the
FBI makes an arrest, the file is turned over to the U.S. Attorney’s office for
prosecution.
Although it was the FBI’s job to interview me first, Figel was sent with
them because the information regarding the billion-dollar loss was brought
to the U.S. Attorney’s office directly from the Federal Reserve Bank.
Apparently, the FBI yielded to the U.S. Attorney’s office the right to initiate
the investigation.
First they asked about my trading. They needed to understand how I’d
caused a $1.1 billion loss. Stroz said, “I know it’s hard to talk about it.
Reading the translation, I can sympathize with your bad luck. It must have
been difficult to come forward like this.” I sensed that his sympathetic
demeanor was genuine. He showed me a copy of the letter I had sent to
Fujita. It was my letter, but I couldn’t understand how in the world they had
gotten it. My brain was turning as fast as Figel’s.
“Is this the letter you sent?” Stroz asked, putting it back in his briefcase.
 “Yes, it is….” I noticed Japanese writing at the top of the first page. It
had been faxed from our International Division on September 21, two days
earlier. Daiwa’s International Division must have sent it to the New York
branch, and they must have given it to FBI. But why? Instead of
speculating, I decided to just ask him: “Where did you get that?” I asked
casually, as if I were inquiring where he bought his tie.
“Sorry, I can’t tell you that. It’s privileged information.” So that’s how it
was. I gradually realized that the bank must have turned me in, along with
my confession letter. Banks were required by the Federal Reserve Bank to
file a criminal referral form when they find any criminal activity. Although
unauthorized trading is not necessarily a crime, making false entries into the
bank’s books creates criminal liability.
For twelve years, I had devoted myself to reducing the loss, but instead
had caused more damage throughout. I understood Daiwa’s situation better
than anyone because, over the years, I had kept my eyes open and had run
many simulated tests in my head.
At that point, the only way to save it from further damage was to inform
the CEO about everything, including the possible repercussions, so that he
could take the necessary steps.
I felt a sense of loyalty to the bank, so I put my destiny in the hands of
the CEO and sent the confession letter despite the legal risks to myself. To
avoid the information leaking out, I had not consulted a lawyer. Besides, no
lawyer would let me write such a self-incriminating letter.
In addition, I had saved every confirmation to substantiate the losses
and had worked more than forty days with the bank’s auditors to reconstruct
the trades. I could have shredded all the documents, taken a two-week
vacation instead, and been in some obscure country where I could never be
found.
Two weeks later, when I didn’t return to work, the bank would realize
that something was wrong, but it would take years before they figured out
what. Assuming the bank was still in business. Why didn’t I? I just did not
regard myself as a criminal.
In suggesting what the bank should or shouldn’t do, I had left myself
wide-open, legally. I had put Daiwa’s interest ahead of my own because I
felt responsible and was in a position to help them. In return, I expected
them to be fair with me. If they felt that it was necessary to report it to the
U.S. authorities, I had no problem, but I expected them to give me ample
time to secure my own attorney. Instead, they tricked me into believing that
I was still helping them, while at the same time they were reporting me to
the authorities with my confession letter as evidence. This was the turning
point when my sense of loyalty was replaced by a thirst for vengeance.
Figel had no idea this was going on in my mind. To his question of what
the bank had done since receiving the letter, all I could tell him was what I
had been led to believe, which was that Daiwa wanted to conceal the loss
from the U.S. authorities. In order to keep me silenced until they were ready
to announce the loss publicly, Daiwa needed me to believe this scenario, so
I won’t run to my attorney. They were so afraid that this story would get out
prematurely.
Without knowing that I was tricked, I told Figel they had asked about
transferring it to an offshore company and had met with the Japanese
banking regulators, the MOF, on August 8 and were tacitly instructed not to
disclose anything until October.
To cement the story, I told him one of the directors had wanted to
resolve the problem in such a way that no one would be hurt. Figel accepted
my story. His eyes blazed with excitement, and his pen moved faster than
the wings of a hummingbird.
He smelled a corporate cover-up with the potential for mega-buck fines.
And this was a Japanese bank! No concern for a systemic risk. Besides, no
American citizen or politician would protest against ripping apart a
Japanese bank. Many might be enthusiastically in favor of it.
While responding to his questions, my mind was busy trying to assess
my culpability. It was already after 8:30 p.m. I started to worry about
Akemi, so I asked if I could go home. Figel looked at Stroz and told me to
wait while they went into the next suite.
Five minutes later, they returned with solemn faces. Figel said matter of
factly, “We’re sorry. But we have to place you under arrest.” And Stroz read
me my Miranda rights. I protested that he had promised to take me home.
“Because you admitted to committing a Federal crime, we can’t just let
you go.”
“Then let me call my fiancé. She must be worried to death.” They
agreed, so I got up and walked to the phone. My legs were wobbly from the
shock. Akemi answered right away.
“I can’t come home tonight,” I said. “This thing is getting very
complicated. Could you bring me a change of clothes and some toiletries?”
I was feeling so bad with her anxiously waiting for me with dinner on the
table.
“Are you okay?” She knew something was wrong from my tone of
voice.
“Yeah, but this may take quite a while.” At that time I had no idea how
accurate this would turn out to be.
“As long as you’re okay, do what you have to. I’ll bring your stuff right
over. You want an extra sweater, too?”
“No, I’m fine,” I said, feeling terribly sorry for her. I hadn’t thought
about how I was going to break the news to her. Imagining her devastation
made me regret having become involved with her.
What a cruel thing to do, to carry on as if everything was perfect when,
in fact, I was doomed from the day we met. What a ruthless SOB I was! I
detested myself for lying to this ever-trusting woman who loved me so
much. The thought of her packing my clothes with flurries of concerns
about me made me distraught.
She was there in fifteen minutes. I hugged her casually so as not to
alarm her. They let us talk for a little bit, and I did my best to reassure her
that everything would be normal once the investigation was over.
I had to muster a confidence that I didn’t feel. In fact, I had no idea what
was going on or when I would see her again.
Akemi looked a little bewildered when I told her I wasn’t sure when I
could come home. But being the daughter of a prominent Japanese
businessman, she knew not to ask questions about such affairs.
When I looked out the window and saw her leave the motel, I swore to
her that I would do anything to make it up. “I will prove I am worthy of
you….”
Now that I was arrested, I decided not to say a word to them until I
talked to an attorney. Stroz asked if I had one. I knew two, the ones I’d used
for my divorce and real estate transactions.
He said I needed a criminal defense attorney. I asked him why, because
if I had confessed, I presumably had no defense. Then again, I realized a
good defense attorney could make a huge difference, such as in the case of
O.J. Simpson, which was being fought in the court at around that time. The
only problem was that I had no money to hire a high-powered attorney of
Johnny Cochran’s status. All I could scrape up was about $20,000, and I
knew any elite lawyers charged $350 to $500 an hour.
 At any rate, Figel and Stroz would not be able to extract any more
information from me until I retained a lawyer the next day. Figel, in
particular, was not happy, but he said he would wait for me to obtain
counsel.
They left around 11:00 p.m. (Later I found out that they raided Daiwa’s
midtown office that night and confiscated nearly 100 cardboard boxes of
documents.)
I was to sleep in the bedroom with two FBI agents keeping vigil in the
living room. When I went to the bathroom to brush my teeth, an agent told
me not to close the door because they had to be able to see me at all times
for security reasons. What if I had to use the toilet? It ticked me off because
this was the first time I was denied my right to go to the bathroom in
privacy.
It began to sink in that I had been arrested and was in the custody of the
mighty FBI. My head buzzed with questions.
“Good night. I guess you want me to leave this door open?” I
challenged.
“Ah…you don’t have to leave it wide open; just don’t close it.” With
this mild victory, I turned off the light. Lying down, I knew I had a lot of
thinking to do.
The bank had clearly decided to turn against me and hadn’t seen any
reason to reveal their plan to me or to destroy my confession letter to
protect me. I felt disturbed by my own vulnerability, of not knowing my
fate. How in the world would I find a criminal lawyer on a Sunday?
As I closed my eyes, an image of Tsuda’s round face flashed in the
darkness again and again. Why had he betrayed me? I didn’t know why
he’d turned my confession letter over to the authorities. He should have
known that it was as incriminating to the bank as it was to me. They must
have been advised by their attorney to do so. (Later I found out that Daiwa
had hired Debevoise & Plimpton as counsel, where U.S. Attorney Mary Jo
White had been a partner prior to this government position, and then moved
back there in 2002.)
Thinking about Akemi lying alone, wondering what was going on, my
heart ached and I mumbled out loud, ‘I am so sorry.’ I felt I’d been pushed
along the gangplank and over the edge by forces beyond my control, and
there was nothing I could have done that would have made my situation any
better.
 September 23 1995. I was under arrest. My life had taken yet another
turn for the worse.

1994 Daiwa’s new Downtown office in the World Financial Center overlooking the Statue of Liberty.
This is where I wrote my ‘confession’ letter.
Part 2

1969
 Chapter 4

Early Days
Those who had known me as a young man would never have predicted the
nature of the dilemma in which I now found myself.
If they had tried to project my future, based on my goals and attitude,
they would not have believed I would have ever left Japan, let alone
become embroiled in such a mess.
When I graduated from high school in Japan, my father, who was
assigned to his company’s New York office, told me to come to America.
In those days, all Japanese exporters had offices in New York as their
North American base. Except for large trading houses, most of the medium-
size exporters sent two to five representatives from Japan to handle sales
and documentation. They were usually stationed there for three to five
years. Most representatives opted not to bring their families because it was
too costly. So my father was alone in New York.
When my mother told me of his instructions, I flatly refused. I was
happy in Japan and saw no reason to leave. Besides, I had a girlfriend with
whom I was madly in love. Not giving up, my father sent people to talk to
me.
They said it would be beneficial for me to go to college in America
because Japan needed people who were proficient in English and capable of
interacting with Americans.
I gave in, with the understanding that I could return to Japan in six
months. In June 1969, I landed at Kennedy Airport. I was the proverbial
fish out of water.
My father’s office was in midtown Manhattan. His company exported
clock radios and photo albums from Japan but until this time, I had no idea
what he’d been doing.
In those days, ‘Made in Japan’ was synonymous with ‘cheap’ or
‘junky.’ Even cars like Toyota and Nissan were similarly branded. My
father explained that Japan was busy trying to build up its foreign reserves
so it could purchase raw materials from foreign counties to rebuild its
infrastructure, and our mission was to earn U.S. dollars by selling anything
we could here.
With the U.S. dollar being the mode of international trade, a nation
could not buy necessary products from other countries without it. The most
important resource Japan lacked and needed to buy was oil.
After a few months, I began to like America more than I had expected,
and I wanted to stay longer. So I began looking into attending a college in
the U.S.
In February 1970, I was admitted to Southwest Missouri State College
(now Missouri State University) in Springfield. My father was delighted. I
packed my bag and got on a plane to St. Louis, the gateway to the West. My
American dream had begun.
My college days were somewhat unexciting. Springfield was not
exactly the entertainment capital of the world. The population was about
100,000, but 30,000 were students. The most exciting place in the whole
town was the Student Union Building.
Since my purpose was not to learn anything specific but to be
‘Americanized,’ I participated in numerous activities. I joined the
gymnastics club; I had been a gymnast since the age of ten. I played guitar
and sang folk songs in a coffee house with a partner. In Japan, I had been a
big fan of Peter, Paul and Mary. In my last year, I became a cheerleader, and
the only gymnast on the squad of five guys and five girls, and used my
tumbling ability to do back handsprings all the way across the football field.
Meanwhile, a wonderful girl from St. Louis noticed me flying through
the air. We hit it off right from the start. She seemed unique, and special.
Our racial and cultural differences retreated into the background. There was
clarity between us; in comparison, the rest of the world buzzed with static.
We fell in love and got married. To support us financially, I worked full-
time at a Chevrolet dealer selling trucks to Ozark farmers.
1973 Missouri State University campus
 1974 My senior year in Missouri State University. I was a cheerleader (front left).

Completely Americanized, I returned to New York, with my American

wife, full of confidence. Nothing could have made my father happier. We
took an apartment in Queens, because, by this time, my mother had come
over from Japan, and she and my father were living nearby. My parents
loved my wife. For a job, my father made arrangements for me to have an
interview at Daiwa Bank’s New York branch.
At the time, Daiwa was the eighth largest bank in Japan. For more than
ten years, my father had known Mr. Matsui, the general manager of its NY
branch through their business dealings. Although I wasn’t certain if I was
cut out for banking, since I had no idea what they did here in New York, I
just went without any preparation.
In Japan, banks were the second most desirable occupation, trailing a
government job. They were very popular among elite college graduates
because a bank job was considered semi-governmental and was
permanently secure. After experiencing economic devastation following the
war, the security of lifetime employment was of the utmost concern in
choosing an occupation. According to Japanese standards, I should have
been more than grateful for an opportunity to work for a major bank like
Daiwa, because in Japan, in order to do so, you had to have a degree from a
top tier university.
The bank was located in the Marine Midland Bank Building on
Broadway, two blocks north of the New York Stock Exchange. On January
6, 1976, I went to the office on the 33rd floor. After a long elevator ride,
appearing before me was a solid wood door with gold lettering which read
“Daiwa Bank Limited, New York Agency.”
I was expecting glass doors with counters and tellers inside. Instead,
when I stepped inside, a panoramic view of Manhattan greeted me. The
receptionist was expecting me and told me to follow her. Walking behind
her along waist-high cabinets separating the hallway from the large office, I
saw fifty or more desks in the main room. Behind them a dozen Japanese
men and thirty to forty American women were working. The scope and
mystery of the operation made me feel nervous.
I waited for Mr. Matsui in an elegant room with cherry wood panels on
the wall. He was about fifty years old, with his hair combed back, and
somewhat overweight. “Your father asked me to interview you,” he said, as
if he were under an obligation. He surprised me by saying the bank could
definitely use someone like me as a go-between for the Japanese officers
and American workers because Japanese officers were not very adept in
speaking English.
There were twelve Japanese officers and thirty-five local employees.
Except for three men, the local employees were all young women. There
was one other U.S.-educated Japanese man named Yamada, who was to be
a trader at our new subsidiary, Daiwa Bank Trust Company, which was to
open in a few months.
To my surprise, I was hired on the spot and told to report to work the
following Monday. The personnel manager told me that I would be
assigned to the securities custody department for the time being. This was
my first position.
There were two people in the securities custody department: a Japanese
supervisor who was to be my immediate boss and an American woman. He
was the youngest Japanese officer in the U.S. operation, and she was
probably under 20 years old. From this combination I assumed this was the
least important department. I was right; it wasn’t even recognized as an
integral part of the branch. It was part of the loan department.
 1976 Securities Custody Department My first year at Daiwa Bank. It was a department of just two
(center).

My boss, who was about 30, taught me what the department did. In
Japan, Daiwa Bank acted as a trustee for Japanese mutual funds invested in
U.S. stocks. When they bought stocks, we settled the trades for them in
New York. In those days, stocks were held in the form of physical
certificates. An investor had a choice of receiving them or keeping them
with his or her broker. Brokers kept their customers’ stocks in ‘street
names,’ meaning registered in a readily transferable form.
Each morning, we received telex instructions from our Tokyo office, to
either receive or deliver stocks. When our customer sold stocks, we took the
certificates out of the vault, endorsed the back, and handed them to our
runner to be delivered. The deliveries were to be made by 11:30 a.m., and a
check would be picked up after 1:00 p.m. The process of receiving stock
certificates was the reverse. A broker’s runner brought certificates to our
window. We would give him a receipt and examine them to make sure
everything was in order. When he returned after 1:00 p.m., we gave him a
check. Then, the certificates we received were taken to the transfer agent to
have new certificates issued in our name.
In those days, hundreds of elderly messengers walked around Wall
Street with leather bags full of stock certificates, which were all endorsed
and negotiable.
When the public interest in stock trading began picking up rapidly in the
mid-1970s, Wall Street’s brokers, dealers, and banks realized how
inefficient and cumbersome it was to settle all the stock trades by delivering
physical certificates. They created a centralized clearing and safekeeping
system called the Depository Trust Company (DTC). The participants of the
DTC deposited all their stocks, and, as a result, were able to settle trades
with other participants using a book-entry method. No movement of
physical securities was necessary.
Daiwa had not joined the DTC for necessity, because we had only 10 to
12 trades to settle per day, rather the pressure had been mounting from other
brokers because it was dangerous for them to have to settle trades
physically. At Daiwa, all the transactions were still being recorded
manually in a loose-leaf notebook. There were no computers anywhere in
the bank.
The rest of the office was basically engaged in what we called
import/export financing. As Japanese exporters sold goods to American
importers, there was anywhere from a 30 to 60-day lag between putting the
merchandise on the ship and receiving it here. The exporter wanted
payment as soon as the merchandise left his warehouse, but the importer
didn’t want to pay until he received it. So the bank came in to solve this
conflict by making a loan to the exporter against the cargo.
Once the merchandise reached the importer’s warehouse, he might want
to take out another loan to carry the inventory until it was sold to the
retailer, and we also did that.
Still another service was to exchange currencies. The exporter needed
yen, while the importer paid in dollars, so all import/export transactions
inherently involved foreign exchange. This was the main function of the
New York offices of Japanese banks.
During the following months, I received a crash course in the history of
finance. After WWII, Japan was physically and economically annihilated.
To re-establish and revitalize its moribund economy, the infrastructure, such
as roads, bridges, railroads, and buildings, had to be rebuilt from the ground
up. However, the government’s coffers were empty. In other words, Japan
was broke. So as we all do in that situation, Japan needed to work, work,
work—and save.
It was easier said than done, because work requires either employers or
natural resources, like fertile land or rich mineral reserves, neither of which
Japan was blessed with. So, the Japanese people worked day and night
making cheap gadgets. Earning U.S. dollars was their primary mission.
Ironically, it was much like the war, in that men had to work like slaves for
the sake of the country’s prosperity. Instead of the military bureaucrats,
Japan now had economic bureaucrats, namely the MOF. Under its
unchallenged leadership, Japan rapidly rebuilt its economy through
exporting.
However, the prosperity of Japan as a nation was not reflected in the
standard of living, because most of what was earned in the 1950s and 1960s
went into rebuilding the infrastructure. Men still worked 60 to 70 hours a
week, with only two to three days holiday per year. An average family of
four lived in an apartment of just 400 square feet.
The government encouraged its people to save rather than spend, so that
it could direct the collective financial resources to certain industries that
were deemed essential to industrialization.
As Japanese manufacturers and exporters captured a larger market share
and expanded their business in the U.S., they began establishing their own
subsidiaries to act as the importer in trans-Atlantic transactions, importing
goods from their parent in Japan. My father had been sent from Japan to
fulfill this role, and Daiwa Bank’s primary function was to fill the financing
needs of these subsidiaries.
In addition, Daiwa Bank had a trust function. As one of the trust banks
in Japan, Daiwa was servicing its trust customers (mutual funds and
pension funds) as a trustee. In its trust function, Daiwa held money and
securities in safekeeping and settled all the trades for its trust customers.
When these customers purchased U.S. securities, the securities custody
department of the New York branch settled the trade and took care of the
safekeeping of the securities.
When I began working at the bank, my wife got a job at the United
Nations as an editor. We were solidly on our way to a better life.
In February of 1977, our first son, Ben, was born. Now I was really
achieving the American Dream, married to an Air Force brat and fathering a
son who was an American citizen.
Although I maintained a typical American lifestyle, I did not feel totally
at home. For my family, I needed to be an American, talk like an American,
act like an American, and live like an American. But I knew I would never
give up being Japanese, even if I became a citizen. In Missouri where I
went to college, people acted homogeneously, almost oblivious to their
origin, but in New York, many embraced their heritage. For me, working at
a Japanese bank kept me in touch with my culture and tradition.
Nevertheless, I was happy to have my own family, a wife and a child who
were dependent on me.
 I worked hard. In Japan, a banker’s hours were from 8:00 a.m. to 9:00
p.m., and that’s the way it was at Daiwa. As it took two hours to commute, I
was away from home fifteen hours a day.
When I began working at Daiwa, the business practice of Japanese
banks in New York began to shift. As Japan’s infrastructure was nearly
rebuilt, its growth slowed to a single digit—after hitting double digits
during the 1950s and 1960s. A sharp decline in lending activities for banks
accompanied the slower economy.
The problem was that the Japanese economy was not self-generating, as
it was in the U.S. The Japanese Government continued its policy of
encouraging saving rather than spending. It expected U.S. and European
consumption to support it. However, surging inflation and interest rates
propelled by the first oil shock caused world consumption to drop off
precipitously, and the Japanese economy suffered a major slowdown.
The development of the government bond market also hurt Japanese
banks. The Japanese Government began selling Treasury Bonds in 1965 to
supplement its revenue as the economy slowed. Until the late 1970s, only
banks bought government bonds because the bond market did not exist. In
effect, Japan had a perfect indirect financial system where all savings were
first put into the bank as deposits, and then the bank made all the
investments. There were no alternatives. But, in 1977, the MOF decided to
open the government bond market to the public to relieve the banks’
obligation to own all Treasury securities. This deregulation, however, gave
investors an alternative investment vehicle to the bank deposit. As a result,
the banks’ deposit base began to shrink.
To make up for lost business domestically, Japanese banks looked
overseas for new business. Coincidentally, the sharply higher oil prices had
been draining the U.S. dollar reserve of many less developed countries
(LDCs), and they were in dire need of dollars. In fact, American banks had
already begun making large project loans to these countries. Since most of
the loans were too large for one bank, a lead manager (usually the bank that
negotiated the loan) invited other banks to form a syndication to make the
loan. At first, Japanese banks hesitated because, historically, they had made
loans only with sound collateral, but they couldn’t ask a government to give
them collateral, nor could they put a lien on its land. They would either get
their money back or get nothing at all. It was called sovereign risk. No
collateral. No liens. No guarantees.
 After a year, my boss was transferred to the loan department, and I
replaced him. Occasionally, I helped him read loan invitation letters and
prepare credit applications for headquarters. Large money center banks, like
JP Morgan, Chase Manhattan, Chemical, and a host of others were
negotiating loans with LDCs almost daily. They would send invitation
letters to Japanese banks, who were by this time jumping on any deal. They
made a 1 to 1½% interest margin a year. That was a $10,000 to $15,000
profit on a $1 million loan, and these loans were for many millions.
Each time that we decided to participate in a loan deal, we had to get
approval from the credit department at headquarters. Traditionally, it
evaluated the collateral, analyzed the financial condition of the borrower,
and made a decision, but with these loans, every credit analysis tool was
thrown out the window. On each application, we put the same reason for
extending credit: “The borrower is a foreign government (so it will not skip
town), and Chase and Morgan are leading the syndication (these banks must
know more than we do.)”
Another strategy Japanese banks employed to expand their business
overseas was to establish local banking subsidiaries in foreign countries. A
subsidiary was not a branch in that it was able to accept deposits from
individual depositors and to make personal loans. The FDIC (Federal
Deposit Insurance Corporation) only covered the deposits of a U.S.
subsidiary of a foreign bank, as a branch was considered an extension of the
headquarters. This was the reason why U.S. Federal regulators were not too
keen on the business of branches of foreign banks.
In 1976, Daiwa opened up its 100%-owned U.S. subsidiary, Daiwa
Bank Trust Company (Daiwa Trust) in midtown Manhattan, which had all
the retail banking functions of an American bank. Yamada, the other U.S.-
educated Japanese, moved to Daiwa Trust.
In 1978, my parents returned to Japan because my father was reaching
his retirement age of 65. They had a home in Kobe, where my relatives still
lived. I was the only one left in America. I had no plans to leave because we
thought it would be better for our children (our second was on the way) to
be educated here. In the spring, we bought a two-bedroom cottage in
Lincoln Park, NJ, for $27,000, one of those handyman specials that needed
everything redone.
My commuting time went up to three hours. Our second son was
expected in September, and there was an urgent project that had to be
finished before the fall. Because the house had no heating system and there
was not enough room to install a gas heater, I decided to dig a basement.
One day, I got under the crawl space with a shovel and just started to dig.
For six months my wife and I went under the house to dig our basement.
We dug until 2:00 a.m. every night and then crawled into bed, exhausted but
happy.
Reflecting the increase in foreign investment from Japan, my
department had been steadily picking up more business. By 1979, I had
three clerks working for me. The number of trades we settled had gone up
to almost 50 a day.
Throughout the 1970s, Japan’s trade surplus increased sharply,
reflecting the soaring popularity of Japanese cars and electronics. Following
two major oil shocks, the American automobile manufacturers lost a
substantial portion of their market share to Japanese manufacturers, which
predominantly made compact cars. Twenty-five years after the war, Japan
had earned so many U.S. dollars it didn’t know what to do with them all.
When a country earns foreign currency, unless it is exchanged for its own
currency, it can’t use it at home. Japan was facing a problem of which it had
never dreamed.
The exchange rate for the yen against the dollar had been fixed at 360
after the war by General MacArthur; he picked the number 360 because
‘yen’ meant ‘circle’ in Japanese.
A year before the end of the war, the U.S. hosted an international
meeting at Bretton Woods, New Hampshire, to discuss financial
arrangements for the postwar world. It was decided that the exchange rates
should be fixed for some time to ensure the orderly reestablishment of
international trade. Theoretically, the exchange rate would be set at the
point where imports balanced exports. However, given the differences in
the export and import needs of each country, a certain structural imbalance
had to be accepted.
In the late 1960s, Japan and Germany began running small surpluses
while the U.S. started to show a small trade deficit.
Until 1971, the U.S. dollar had been backed by gold (at $35 an ounce),
but when America began buying up Europe by printing more dollars, the
French called its bluff.
‘Nixon shock,’ as it was called, changed the world currency market
from fixed to floating. The dollar immediately declined in value.
 By the end of 1971, the dollar was down to 308 yen, and it declined
throughout the 1970s to 200. Yet despite a 45% decline in the value of the
dollar, Japan’s trade surplus was still growing at a rapid pace. Every time
the dollar was converted into yen by Japanese exporters, it put downward
pressure on the dollar and upward pressure on the yen. Nevertheless, the
exporters needed to change the dollars they received into yen, even if they
were getting fewer and fewer.
For Japanese businesses to continue prospering, the MOF realized the
value of the dollar could not fall much further. Therefore it had to loosen its
overseas investment restrictions. During the 1970s, most major countries
had numerous restrictions on both capital inflows and outflows.
Japan in particular had a restrictive policy when it came to foreign
investment. The MOF was a control freak. And rightly so, they had done a
great job transforming a moribund economy into the second largest in the
world.
Now the time had come to let Japanese investors invest in dollar-
denominated assets, such as stocks, bonds, real estate, and businesses.
When Japanese investors bought stocks and bonds in America, they first
had to sell yen to buy dollars so they could pay for their purchase.
With U.S. bonds paying more than double Japanese bonds in interest,
investors flocked to U.S. Treasury bonds. In no time at all, there was more
dollar-buying by investors than dollar-selling by exporters, putting upward
pressure on the dollar. Naturally, the MOF loved it. As the value of the
dollar rose, the exporters and investors were both making more money.
They began exporting more and investing more. Being one of the two
Japanese banks offering securities settlement and safekeeping service to
Japanese investors, my department was the primary beneficiary of this
phenomenon.
Because of this, my department became very profitable. In those days,
Japanese officers were stationed here for only three to four years. While
they were at the branch, the branch manager switched them around so
they’d learn every facet of international banking. They were all candidates
to become a branch manager someday.
Consequently, very few specialists existed in Japanese banks then, as
specializing in only one area was considered detrimental to one’s
promotion. Each year, nearly four hundred college graduates were hired
from the top colleges in the nation. No MBAs or Masters, all were
undergraduates.
Once they were sworn in, they were assigned to a local branch and
started at the bottom counting bills as a teller, which they did for several
years. The next step was to go door to door to solicit deposits.
As the MOF had dictated exactly how banks made loans (how much, to
whom, and when), there was no competition among banks. The only true
competition was over who got more deposits. Because all banks offered the
same interest rates, the only deciding factor for the customer was who
would give better service.
These elite bankers were sent out all day, from door to door, rain or
shine, to obtain deposits. Each branch manager was evaluated by how much
in deposits his branch received during the year. To that end, these bankers
would do anything for a 10,000 yen ($50) deposit. In those days, many
housewives would have them take out the garbage, pick up laundry, mail
letters, or even pull weeds in the yard. Luckily, I didn’t have to do that
because I was in New York. But in retrospect, maybe I wasn’t so lucky after
all.
 Chapter 5

Trading Responsibilities
I knew the way to succeed at Daiwa would be to rotate jobs and learn every
aspect of the bank’s business. However, except for a six-month stint in the
loan department, which was voluntary service after 6:00 p.m., I seemed to
be stuck.
Management realized that my replacing one of the Japanese officers
allowed them utilize him in another department. A labor law required a
foreign bank to hire a certain number of local employees for each
countryman they brought from the homeland, so the net cost of bringing a
Japanese officer to New York was well over $100,000 a year. By my taking
over the supervisor position of the securities custody department, they
effectively gained one Japanese officer for less than $30,000.
Another development which made my transfer more difficult was our
participation in the DTC. Our work was becoming too specialized for a
novice Japanese officer with a poor command of English. It was apparent to
everybody in the bank that I was stuck in this position for the foreseeable
future. I didn’t like that because it was a routine operations job.
More importantly, I needed to get home earlier than 9:30 p.m. Japanese
bankers’ hours weren’t compatible with my American lifestyle. In 1979, I
interviewed with a Wall Street broker and a bank in Washington D.C. to test
the waters. What I learned was that I needed to specialize in either
investment or commercial banking. After all, my credentials at this time
were nothing more than as an operations supervisor.
Accepting this, I decided to devote the next three years to becoming an
expert in either one of those fields. I considered forcing management to
transfer me to the banking side by threatening to quit, but the Japanese
managers detested any form of insubordination, and I couldn’t risk them
calling my bluff.
So I decided to study an investment area, specifically, the fixed income
market, a.k.a. the bond market.
Since 1976, our bank had maintained a small bond portfolio of Yankee
bonds, U.S. dollar-denominated foreign bonds. In other words, if the French
Railroad Authority issued bonds in the U.S., they were called ‘Yankee
bonds,’ and they usually had a coupon of 8% to 9%.
My department handled securities, so it was my responsibility to
monitor the prices of these bonds. For a year I had been studying the bond
market on my own to gain more marketable knowledge.
No sooner had I come to this decision, than a second oil shock hit the
world economy. The U.S. was caught in a vicious inflationary spiral that
threatened its core.
In September of 1979, the new Chairman of the Federal Reserve Board,
Paul Volcker, announced a change in the guidelines for its monetary policy.
To combat runaway inflation, the Fed decided to control the nation’s money
supply rather than interest rates. As a result, interest rates in all maturities
soared.
In no time, LDCs began to show signs of renewed financial difficulties
in the face of higher interest rates and sharply higher energy prices. It was a
foregone conclusion that Latin American countries in particular would not
be able to meet their obligations. Large money center banks as well as those
Japanese banks that had expanded into the less-traditional business of
making direct loans to foreign countries were about to learn a very
expensive lesson.
This setback failed to deter Japanese banks from engaging in business
outside of Japan, because the domestic business was shrinking day by day.
The surge in interest rates continued into 1980, when the prime rate
reached 21%. The price of Yankee bonds in our portfolio fell by 40%. Our
subsidiary, Daiwa Trust, suffered a greater setback because the bulk of their
assets were in fixed-rate bonds. This raised awareness in the management
that holding fixed-rate bonds when the cost of funding could fluctuate well
over 15%, was not a safe policy.
Working late hours became so ingrained in my daily routine that any
interaction with my family had to be saved for the weekend. I compromised
my family life to advance in my job.
After rebuilding our entire cottage during the little free time I had, we
sold it in 1979 for $62,000 and bought a larger house in the same town for
$80,000. Our lifestyle was definitely improving— except I wasn’t there to
enjoy it. Nothing was more important to me than my family, and I was
obsessed with working longer and harder to give them what they deserved.
 My father had seldom been at home. His family had been too poor to
send him to a junior high school, so he went to work at the age of 12.
Without a proper education, his future was grim. He came back from the
war in 1945, started a grocery store, and married my mother two years later.
When my sister and I were born, he began studying English. When I
was five, he went to work at an export company and was never home on
weekdays while I was growing up.
Occasionally, he would go overseas and not return for a year or more. In
those days, this was much like going to war. Overseas’ phone calls were
saved for emergencies; post cards were the primary means of
communicating. He would send a card each month to say he was all right.
My father never told me a man must work twenty hours a day to
provide for his family, yet that’s what he had been doing. Without realizing
it, I was doing exactly what my father had been doing: working excessive
hours so my family could have a comfortable lifestyle.
Yet there was a problem: I wanted to derive my happiness from my
family life. My job was supposed to only be a means to an end. I was not
happy working thirteen hours and commuting three hours each day.
American workers went home at 5:00 p.m., even high-powered Wall Street
bond salesmen. Every night, when I left the office, the center of world
finance was completely shut down. All I saw were the cleaning people
coming in and out of the buildings. I felt I needed to change something
before I burned out.
Yet in 1981, the volume of my work increased even more. Because
junior employees left at 5:00 p.m., my assistant and I frequently had to
work past 11:00 p.m., which meant getting home after midnight. I needed to
get out of this rut. By this time I had learned a lot about the bond market
and was writing regular comments to our pension trust’s investment
division at headquarters. Daiwa was the largest manager of pension trust
assets in Japan. A few months later, I was asked to execute bond purchases
by the fund manager in Japan. Within a short time, I had built solid contacts
with most of the major bond dealers.
After the debacle of the LDC loans, a new product entered the scene
called Floating Rate Notes (FRN). These were bonds (or notes for a term
less than ten years) issued by second-tier countries such as Sweden,
Denmark, Norway, Malaysia, Panama, and New Zealand.
 Because of the wild fluctuation in U.S. interest rates, borrowers and
lenders alike opted for floating rate instruments. Rates on these notes were
reset every three or six months, so the fluctuation in the price of the bond
remained relatively small, unlike the fixed-rate bonds.
I began educating the bank, pointing out that although FRNs
represented the debt of a nation, like the LDC loans, they were issued by
more stable countries, and more importantly could be sold prior to their
maturity.
For this liquidity, we would earn only 0.20-0.40% a year as opposed to
1.5% with the LDC loans, but considering the risk, it made good sense to
own them. So I began buying FRNs for the branch, $5 million here, $10
million there.
In short order, we had a solid portfolio of FRNs. As these instruments
gained more popularity among Japanese investors, the law of supply and
demand pushed the price higher. I began moving them in and out of the
portfolio to enhance the return.
In the process, I became one of the most active traders of this
instrument on Wall Street. Meanwhile, I was still supervising the securities
custody department, typing forms, checking the books, approving money
transfers, and so on.
In 1982, I heard that Yamada, the other U.S.-educated Japanese officer
who worked at Daiwa Trust, had been trading U.S. Treasury bonds. The
idea of establishing a U.S. bank to expand into the local market had been a
flop; the only deposits they received were from Japanese people in New
York, which amounted to less than a million dollars. With only one banking
office in midtown, they couldn’t generate enough profit to pay the rent, let
alone the high salaries of several senior managers they had recruited from
American banks. Without any customer base, they had no assets to show on
their books, so they bought Yankee bonds. At the time, they were able to
borrow short-term money at 5-6% from other banks, so with these bonds
paying more than 8% interest, they were able to generate enough of a
margin to earn a profit.
However, the honeymoon didn’t last. By 1981, these bonds had lost
more than 40% of their value, and short-term interest rates were well over
15%. Now all of their assets were producing a negative carry, meaning the
cost was higher than the return. Desperate, they started to speculate on
bonds.
 Bond prices fluctuate as interest rates fluctuate. There is an inverse
relationship between bond prices and the yield on bonds because once a
bond is issued, its coupon rate does not change, even if the market interest
rate (yield) changes.
For example, $100 worth of 10-year bonds with 8% coupons pays $8
interest each year. At the time of issuance, the yield on 10 year bonds was
8%. However, if the current yield goes up to 10%, a bond that pays $8 must
adjust its price to make up the difference. In this case, the price would have
to drop to $80 to bring its yield to 10%. If someone buys this bond at $80
and receives $8 interest per year, he would be getting a 10% yield.
Yamada was placed in Daiwa Trust’s investment department to tackle
this problem. In 1983, his trading produced nearly 80% of the net profit for
Daiwa Trust. He was clearly the rainmaker for them. Or so it seemed.
The general manager of our branch, Mr. Ueba, also acted as the
chairman of Daiwa Trust, but he was not involved in any day-to-day
operations. Despite his chairmanship, his main job was to manage the
branch and his interest was in its bottom line—not that of Daiwa Trust. He
had shown me the trading figures of Daiwa Trust to imply I should be able
to do the same. He was desperate, because the normal branch business was
shrinking every day while losses from LDC loans were mounting.
I continued to buy and sell FRNs for small profits. Because of their
periodic coupon re-fixing, the price of FRNs fluctuated less than $2 on
either side of $100. It was a very conservative instrument.
In order to trade in a timely manner, I was given a $10 million trading
authorization. This was a pre-approved line within which I could buy and
sell FRNs without any approval from management. In those days, I was one
of the few Japanese traders who had a trading authorization of this size.
When I heard of Yamada’s trading success, I asked Mr. Ueba to
authorize me to trade Treasury Bonds, but he didn’t have the stomach for
that kind of risk. Prior to coming to New York, he had been in commercial
banking in Japan. The concept of trading bonds being relatively new, even
in the United States, it looked to him like a financial innovation that he
would never be able to grasp. I would soon come to wish I had been equally
dubious.
 Chapter 6

The Slippery Slope

In the early spring of 1983, I was feeling pretty good booking some $50,000
in trading profits over and above the interest income on the FRNs I had
purchased. After all, this was my side job and the fee income from my
custody operation had been doubling every six months.
One day, a Wall Street dealer told me that an issuance of FRNs was
expected to generate interest, which gave me a good opportunity. He was
one of the two lead managers who were assigned to larger amounts and paid
a management fee for their leg work.
When a new issue was priced, a selling syndicate of dealers called
prospective clients to distribute it, and he called me. Ideally, they liked to
sell their allotment right away. In those days, most of the FRNs were issued
in the size of $200 million -$300 million and sold out even before they were
priced, because Japanese banks were grabbing them to keep their asset
levels up. Without new business to offset the LDC loan write-offs, asset
levels were sinking.
As soon as the notes were sold, the issue ‘broke the syndicate,’ meaning
it went from the new issue market (or primary market) to the old issue
market (or secondary market). Once in a secondary market, the dealers
started making a market for the issue, and anyone could trade it.
March 31 was the last day of our fiscal year. I was proud of having
made more than $50,000 in trading profits during the previous six months,
which the branch had figured into its bottom line. But with this new issue, if
I bought $10 million at $98.80 and sold it for $99.00, I could make another
$20,000. Jim, the salesman at Salomon Brothers, told me that they were
expecting a good demand for the issue, as usual, and predicted that the price
would jump above $99 as soon as it ‘broke the syndicate.’ I saw no risk
whatsoever in this trade. The price of FRNs almost always popped up
slightly after the issuance; certain institutions couldn’t buy them fast
enough because of their slow approval procedure. Many issues were all
circled (bought) within a day or two, but it took more than three days for
some banks to get head office approval. This was where my trading
authority gave me an edge; I was able to act instantly. The demand usually
picked up after the issue went into the secondary market.
I circled $10 million, intending to make a quick $20,000 and get out
with it. I anticipated receiving praise from my superiors. However, that
afternoon Jim told me there were some unsold inventories left, which was
mildly bothersome. By the next day, the issue still hadn’t broken the
syndicate because the dealers still had almost half the issue on their shelves.
They cited various reasons for this poor reception, one of which was the
timing. Many prospective clients, mainly Japanese banks, were reluctant to
add to their portfolio prior to March 31. So dealers began cutting the price
to attract buyers. By that afternoon, if I were to sell my purchase back to the
same dealer, he’d pay only 98.40, which would be a loss of $40,000!
Paralyzed by this development, I berated Jim on the phone: “You told me
you were seeing lots of interest. Where is it?”
“We were seeing it,” he insisted. “Our clients expressed a strong interest
in the issue, but then they closed their book for the fiscal year. They’ll look
at it after April 1, but not before. I’m sorry.”
“That’s not going to work for me because I’ve got to sell before March
31,” I shouted. “I bought it for a flip, not a keep.”
“I don’t think the price will do much better by the end of the day. Other
dealers are talking about breaking the syndicate so they can cut the price
and get rid of it. They don’t want to be stuck with it for their quarter-end
either.” A knot of anxiety formed in my gut; it didn’t look good. The dealers
were going to break the syndicate and mark down the price. According to
our rules, I was supposed to report each trade to the management at the end
of the day, but since the issue was not officially announced until late in the
day, reporting it the following day was acceptable.
Jim phoned me at 4:00 p.m., “They just broke the syndicate. I guess
dealers bought them on their book and are now trying to blow them out.”
“For God sakes, where is the bid now?”
“We’re showing 98.10.”
He sounded apologetic. At 98.10, I would lose $70,000 and wipe out the
profit I’d made the last six months and more! What a disgrace! I could
imagine how disappointed Mr. Ueba would be, which could easily prompt
him to take away my trading authorization. I was both frightened and angry.
I couldn’t lose all I’d worked for because of one stupid trade. I regretted my
reckless decision to go for one last win.
 It hadn’t been a bad idea in itself, but the timing was. If it were January,
I could buy it and hold it, even if it went through a few days of indigestion.
Since we didn’t mark our portfolio to market until March 31, such a trade
would have worked out. But if I paid for it now and held it, I’d have to
mark it to market on March 31 and take the unrealized loss of $70,000
against the profit I had accumulated. I told Jim I would call him back in a
few minutes.
If I didn’t sell it back to the dealer then, in three days I’d have to pay
$10 million. Although I hadn’t decided what to do about the loss, at least I
knew what I had to do immediately, which was to sell it back before it went
down any more. I called Jim and asked for a firm bid (the price at which he
would buy $10 million of this FRN). “My trader says you should wait until
April because right now he is trying to get rid of his own unsold inventory.
All he can show you is 98.10.” I had no choice. “That’s done, Jim, at 98.10.
I’ll send you $70,000 on the settlement date.”
Hanging up, a wave of nausea swept through me. I had to make a
decision very quickly, either to report the trade and take the medicine or…
let it go. Yes, it was quite possible to just let it go.
Ever since I’d started to buy and sell securities, I’d been settling the
trades by myself. Because my department had all the functions necessary to
settle customers’ trades, no one questioned who should settle the
proprietary trades (trades done for our own account), so I had the job of
doing it. There was not a scintilla of concern about letting the head of the
securities custody department engage in both proprietary trading and
settlement.
So here I was, at a critical juncture in my life. It would not be a problem
to pay $70,000 to the dealer with no one knowing about it. It seems hard to
believe, but it was true. Our bank made hundreds of payments and received
equally as many incoming wires each day. Most of them were done by wire
transfer, in which money was moved between two banks via their accounts
at the Federal Reserve Bank of New York. A bank has to balance its
checkbook just like ordinary people. The only difference is that they have
hundreds of items to reconcile. Our reconciliations clerk did nothing but
that. He checked the daily credit and debit statements from the major NY
banks where we had our checking accounts against our internal books. Each
day he found ten to fifteen items that didn’t match. He made a list and
reported to management. Some were eventually resolved as matches
showed up within a week, but there were at least a hundred items that had
never been resolved and were left as ‘outstanding items.’ If an individual
finds $200 debited from his bank account without a record of him writing
the check, he would try to find out what happened. But Daiwa didn’t do
that.
I had never been in this much of a dilemma during the thirty-one years
of my life. It was dishonest to break the bank’s internal rules, and it went
against my principles. My father was a stickler for honesty and was trusted
and respected by everyone, including me. On the other hand, if I reported
the trades and the loss, it would most likely preclude any chance of me
becoming an investment manager, and I’d have to go back to being the
operations manager.
I’d worked so hard, and sacrificed so much. Working until almost 10:00
p.m. every day, I had spent very little time with my children. My boys were
already five and three-and-a-half. After gut-wrenching deliberation, I
decided to compromise my integrity to save my future. I had no doubt in
my ability to mend the broken vase. All it had was a small chip, which I
would fix with no one’s notice. Had we had tight internal controls in place,
I certainly wouldn’t have even considered it, as the consequence of
breaking the bank’s rule would be far worse than a $70,000 loss. But the
fact that we had no internal controls made decision making much easier.
Upon reaching this decision, I felt at ease because I didn’t have to face
the consequence of my mistake immediately. The agony of self-loathing
didn’t hit me until two days later when I had to pay $70,000 without
authorization. The anxiety didn’t stop there, either. I still had to put on
several profitable trades which would not be recorded on the books of the
bank to wash the loss away. I planned to get this fixed in the next few
months, but pretending everything was fine began taking a toll on me right
from the start.
At the end of the fiscal year, on March 31, after all the numbers were
reported to headquarters at 10:00 p.m., we had a traditional year-end party.
It was only done among the Japanese officers; the local employees were
excluded. Sushi and tempura were delivered. All the tables in the
lunchroom were put together to make a long conference-style table, with
Mr. Ueba in the center. When everyone was seated except for a few still
punching telex keys, he raised a glass of beer, thanked everyone for
working hard, and shouted, “Kanpai!” (“Cheers!”) We all stood up and
repeated, “Kanpai” after him, and began the party.
He announced that, thanks to my department, the original profit
projection had been met despite the softness in import/export financing. At
the beginning of each fiscal year, the branch manager submitted a
projection to headquarters. If the projection was not met, he would not be
promoted after his term in New York expired. Actually, we hadn’t made the
projection if we counted the loss resulting from a write-off of LDC loans,
but since they had been put on by the previous general manager, Mr. Ueba
was not concerned.
Usually, I enjoyed this party, but not this time. The figure of $70,000
flashed in my head every time my contribution was praised. My department
had earned more than $300,000 in fees, but that did not ease my sense of
guilt in the least.
As the new fiscal year started, my focus on picking good trading
opportunities was replaced by a desperate desire to end the deception as
quickly as possible. In such an impatient, emotional state, one never trades
well, and I was no exception. In three trades during the month of April, the
net result was zero.
This was by no means unusual in trading FRNs, which had very small
price movements. But it wasn’t good enough for me because for each trade,
I had to create a fictitious entry on the book to account for.
Meanwhile, I was executing trades at the request of our pension trust
department on Yankee bonds. For example, they would give me an order to
buy an issue at 102. I would wait for a good timing and get it at 101.25,
thereby saving them $75,000 on one trade. The price of these fixed-rate
bonds fluctuated as much as $200,000 a day (on $10 million face value). I
thought that if only I could trade fixed-rate bonds, I could resolve my
problem quickly.
For two weeks, I had been so preoccupied with the loss that I had not
been attentive to my job as the supervisor of the department. Luckily, we
hired another person to take the workload off my assistant, so I didn’t have
to do as many manual tasks as before. But I just couldn’t concentrate on my
duties.
My perception was becoming skewed from the pressure, and I began
thinking I didn’t need to stick to FRNs because either way these trades were
unauthorized. I was not authorized to trade T-bonds or make any off-the-
book trades. Either way, the painful truth was that I would be blatantly
violating the internal rules of the bank.
Needing to get out of this mess as quickly as possible, I decided to trade
T-bonds. For $10 million T-bonds, I needed to make 23/32, a twenty-three
32nds rise. T-bonds traded in increments of 1/32. The average movement
during a day was about 64/32or 2 points. In executing Yankee bond trades
for our pension fund manager, I had been watching the T-bond market for
more than two years, so I was no stranger to it. I just needed to pick the
right time to pull the trigger. It seemed easy.
Once I decided to do this, I had to make sure the dealers’ salesmen
knew I could trade T-bonds. I called Paine Webber with whom I had been
trading Yankee bonds with and told him I was going to start trading T-
bonds. Jack, the salesman, was ecstatic because it was the easiest product to
sell.
There was no credit risk in Treasury bonds, only the price movement. It
was a pure trading vehicle. T-bond traders were gunslingers because
nothing mattered but the timing. One second could make a difference of
$200,000 on ten bonds. Since the Fed began focusing on the money supply,
on every Thursday at 4:30 p.m. when they announced the weekly money
supply numbers, the T-bond price jumped up or down as much as three
points (3%) in a matter of a few seconds.
Jack started sending me charts of T-bonds and the daily comments by
his firm’s technical analyst. T-bond prices had been rising sharply since
mid-1982, after their yield reached nearly 15% in late 1981 to early 1982.
The market was predicted to do even better soon. In fact, the price of 98
24/32 (98.75) was a strong support level, and once it was reached, a quick
bounce was anticipated.
There was a problem, however. I didn’t have a quote machine which
shows the real-time price data of Treasury bonds. There were two monitors
in the money and foreign exchange department, which was across the floor.
I told Jack to call me as soon as the T-Bond price neared 98 24/32.
Around 10:00 a.m., Jack told me they were trading at 98 30/32. I had
been studying this and thinking about it for some time, and now it was time
to place an order. Since I didn’t have any way to monitor real-time price
movement, I had to place a buy order that would be executed when the
market hit my buy-level.
 Now that I was actually placing an order to purchase $10 million worth
of securities without any knowledge by the bank, I felt my body tremble
with apprehension. Like a clam closing its shell, I muted all senses of
belonging, comradeship, and loyalty, to cancel the pain of betrayal. Yet
there was also a thrill, because in a few more days I hoped to be free of my
guilt.
I told Jack I wanted to place an order to buy 10 bonds at 98 24/32. To
make sure no one understood what I was saying, I covered the mouthpiece
and spoke quickly. “Good, let me repeat, I am taking an order to buy 10
million of the current bond at 98 24/32, for the day,” he replied. He was
excited I was beginning to trade T-bonds. Naturally, I couldn’t tell him this
was going to be the first and last time.
The clock on the wall ticked away and my eyes traveled back and forth
between it and the telephone. After half an hour, I walked over to the other
side of the office to check the monitor. The T-bonds were trading at 98
22/32, which meant my order had to be done. So I quickly walked through
other departments back to my desk. From several feet away, I heard my
phone ringing and knew it was Jack. “Hello, Tosh? Yeah, you are done at 98
24/32.” “Okay, thanks.”
Now the real game started. I needed to decide if I should wait until the
price went up to 99 15/32 to make 23/32 (equivalent to $71,875) or take a
smaller profit and try to achieve my goal in a sequence of trades. It was
hard to judge, but regardless of how I was going to do it, I was relieved that
the resolution of the problem was at hand.
Not being able to see the price action, I felt blindfolded. I called Jack
every five minutes. The price had been fluctuating around 98 24/32, the
level at which buyers were supposed to enter. This was called a support
level on the chart. Jack told me the first time down, it bounced up to 28/32,
but fell back again and had just traded at 20/32. “If 24/32 was such a strong
support, why is it trading at 20/32?” I asked, as if I didn’t know the
implication. Had someone asked me, I would have said, “If the price breaks
an important support level on the downside, it means either the sellers are
more fundamentally driven, or the buyers who had appeared at the previous
level are no longer there. The price will go down to the next support level.”
But I acted as though Jack had some special explanation or insight for me.
All he said was, “I don’t know, Tosh, maybe it’ll come back.” Yet this
gave me hope. I believed his shallow speculation because I could not accept
any other scenario. As soon as he said it, the T-bonds dipped to 98 16/32. I
was down 8/32 or $25,000. I got off the phone, as if that would stop the
pain of acknowledging what was happening. At least I didn’t know where
the market was. The clock had stopped at minus $25,000. Hopefully, when I
called him the next time, it would be back to 98 24/32, or even higher.
I told myself not to panic because T-bonds fluctuated a lot and 8/32 was
nothing more than a little noise. However, the warning signal of a technical
breakdown was blinking in the back of my head, which made me uneasy.
For what seemed hours, but was actually no more than twenty minutes, I
prayed for the price to go back up. Just as I reached my hand to the phone,
it rang. It was Jack, in a subdued voice, “Tosh, the bonds fell apart. They
are trading at 97 24/32 right now.” “97? 97-24?” “Yeah, unfortunately.”
The atmosphere turned dark, as if a storm cloud had moved into my
office. I could not focus on anything around me and could only stare at the
phone. It took me several seconds to realize I had lost another $100,000 and
several more seconds to realize I could lose still another $100,000, because
the next support level was at 96 24/32.
My mind froze. A tiny shiver ran through my body all the way up to my
brain. No! No! No! This couldn’t be happening! Oh, God! What had I
done? “Tosh, are you all right?” he asked. “Yeah, I’m all right.” My words
were the exact opposite of what my mind was screaming at me. “I think you
should cut the loss and take a look at it again later,” Jack advised. It was
merciless but prudent advice. “Get me a bid, Jack,” I told him. I must have
sounded like a ghost. Jack said, “He will pay 97 20/32. You’d better hurry
because it’s still going down.” “Okay, do it. Get me out!” I shouted, not
caring if anyone heard. Despair and anger overwhelmed the desire to appear
calm. Jack came back in a second and said, “Done at 97 20/32. Sorry, it
didn’t work out for you. But thanks for the order.” “You are welcome,” I
calmly replied.
A few minutes later, I found myself in the restroom. I couldn’t
remember how I got there. Looking at myself in the mirror, I didn’t
recognize the man I saw. Who was this person? Was he in trouble? Too bad.
‘I feel sorry for you,’ I thought. I was not rational. I was on the verge of a
schizophrenic split. A loss of $182,000! It would take me six years to repay
it if I turned over my entire salary. It was impossible! No one I knew had
that kind of money to lend me.
 The next day I processed the payment of $112,000. Although I was
supposed to get approval from my boss to send money out of the bank, I
had permission to use his chop. A chop is a wooden stamp with a name
carved on the bottom that is applied with red ink. In Japan, people used this
instead of a signature. My boss, who was also the head of the loan
department, hated to chop documents related to the securities custody
department, so he had given me permission to use his chop whenever I
needed it.
In looking back at this now, I can say that he trusted me, but he was also
lazy. In those days at Daiwa Bank’s NY branch, an employee like me could
have sent out $1 million or so without anyone asking questions for a month.
Amazing as it seems, that’s how it was. In hindsight, if Daiwa Bank had
instituted a normal level of internal controls like any other financial
institution or business, I would have had no choice but to report the original
loss of $70,000, and that would have been that. I am not saying this to
justify my action. Rather, I am simply stating the fact.
 Chapter 7

The Whirlpool
Realizing what a mistake I had made plunged me into a severe depression.
In a span of a month, my priority had shifted from protecting my position as
an FRN trader to protecting my employment and now to protecting my
image as a decent human being.
After seven years of hard work constantly postponing my family life,
the progress I had made toward achieving my goals was in jeopardy—but
not lost, because I still had a choice.
I weighed my options. I couldn’t really think and just repeated to myself
the arguments I had used at the beginning: by coming forward and
admitting what I had done, I would be fired and disgraced; not only would
the fruits of my labor be lost, but also my reputation would be so damaged
that I will never work in this business again. On the other hand, a few good
trades would let me write all this off as a bad dream. And the chance of it
happening was not one in a million, but at least 50-50. I went around and
around for days, but in the end I decided there was nothing to lose by trying
once again to recoup.
I don’t think things were ever the same with my family after this. I was
keeping a major secret that ate away at me like a cancer. Its revelation
would ruin not only my life, but also the lives of those I loved. Every time I
thought about my wife and children being thrown out on the street, I knew I
had to continue the masquerade. It became a war against me, a war I had to
fight by myself and win for my family.
In the midst of my preoccupation, the volume of business in our
department continued to soar. Japanese investors were enjoying the rising
price of stocks and the rising value of the dollar. This combination was like
having Thanksgiving and Christmas on the same day. Yet the banking
industry in general was going through its roughest time since the 1930s.
After taking a bath on LDC loans, commercial banks poured money into the
energy sector. They made loans to anyone with an oil rig. The worst
investment was to Mexico, an oil-producing nation. When crude oil prices
began cascading down, all the excessive energy-related investments went
sour. To help the banks, Congress approved an $8.4 billion rescue loan to
Mexico.
American banks were falling behind their Japanese counterparts
because they were losing business faster to investment bankers. In 1933, the
passage of the Glass-Steagall Act had prohibited commercial banks from
engaging in the investment banking business, which included buying and
selling as well as underwriting corporate securities.
While commercial banks had cornered the loan market, investment
bankers had cornered the debt market. Just like LDC loans and FRNs, loans
and bonds are the IOUs of a corporation or a government. They paid
periodic interest to the lender (in the case of a loan) or the holder (in the
case of a bond), and the principal was repaid at maturity. The main
difference was that bonds are liquid (could be sold) while loans are not.
Over the years, commercial banks had been trying to get into the
investment banking business because they had to commit their own capital
when making normal loans and were stuck until the loans were paid off (or
not paid off). On the other hand, investment bankers lived on fees and
commissions. They didn’t commit their own capital to bonds. They
underwrote bonds (got a corporation to issue bonds) and sold them to
investors.
With the further deregulation of the financial markets necessitated by
the huge volatility in interest rates, investment bankers took the opportunity
to invade the realm of commercial banking and securitize much of the loan
market.
For example, mortgage loans were made into bonds called CMOs 1 (a
pool of mortgages), and corporate loans were made into corporate bonds
(high quality) and junk bonds (low quality). What was interesting in this
battle of the debt market was that although investment bankers had made
enormous amounts of money buying and selling other people’s debt,
commercial bankers were also able to pass on part of their capital
commitment responsibility to the investors.
The epitome of this role reversal was the Savings and Loan banks
(S&Ls) buying junk bonds from investment bankers. Historically, the
primary business of S&Ls was to make mortgage loans. They made long-
term (30-year) mortgage loans and funded them in a short-term market.
However, in the early 1980s, when short-term rates skyrocketed well above
the prevailing long-term mortgage rates of previous years, all their assets
were producing a negative carry. When Congress relaxed the restrictions on
what they could purchase, they began the famous buying binge of high-
yield corporate bonds (junk bonds). Everyone knows what happened next:
investment bankers made a fortune, while S&Ls went belly-up.
Meanwhile, the Japanese commercial banks, unlike their counterparts in
the U.S., owned more than 30% of total outstanding public stocks, in what
was called ‘cross holding.’ The banks and businesses owned each other’s
stocks in order to privatize public companies. Together they owned more
than 65% of all public stocks, while individual investors owned no more
than 25%.
At the end of World War II, individual investors owned 80% of the
public stocks in Japan, although many were barely breathing. As new
strategic businesses were established to rebuild Japan’s infrastructure
during the next twenty years, the MOF encouraged the banks to invest
capital in them. As the Japanese economy began to take shape, the MOF
was able to control the businesses indirectly through the banks’ ownership
of their stock.
It was essential for the MOF to have total control, but as the economy
achieved its phenomenal success in the 1950s, there were threats from
abroad. With the dollar fixed at the artificially high level set at Bretton
Woods, the U.S. was exporting capital to buy businesses in France and
Germany. Feeling the threat of U.S. capitalism moving east, the MOF
encouraged a cross-holding of shares between banks and businesses as a
strategy to dampen any interest in Japanese businesses by Americans.
How does that work? Suppose Bank A and Company B issue one
million shares to each other. If their share prices are $50, both would
increase their stockholders’ equity by $50 million and their assets
(securities) by $50 million. Both companies would become $50 million
richer without any actual capital infusion. Japanese corporations all
participated in this scheme in the 1960s. As a result, the majority shares of
Japanese companies were owned by the banks, with the understanding that
no shares in cross-holdings would be sold in the market. With this
agreement, the market didn’t need to dilute the increased number of shares,
and the price of the stock virtually remained unchanged. This inflated the
market capitalization of Japanese companies to a prohibitively high level,
so no foreign interest would even consider taking over a Japanese company.
And even if they wanted to, the banks that collectively owned the majority
shares of all corporations would not sell their shares at any price.
Hence, the MOF could rest assured that its control over the Japanese
economy would not be threatened by foreign capital. By extending the
courtesy of not interfering with each other’s business, the management of
banks and corporations effectively stole control of the company from the
shareholders. No one could predict that one day this cross-holding of
corporate stocks would undermine the integrity of Japanese financial
system, create the biggest asset bubble since 1920s, and drive the country’s
economy into a deflationary spiral.
With this backdrop, my attempt to recoup the loss proceeded. Yet with
each attempt, the market seemed to go the other way—as if to punish me.
Each time I bought or sold bonds, the dealer sent a confirmation ticket to
the bank by mail. They were delivered to me, and I kept them in my drawer
where no one would see. After a few months, I got better at pretending to be
in a good mood. I was confident no one would notice any irregularities and
concentrated on avoiding a sudden change in mood that might warn the
people around me.
When I left the office, I enjoyed an American family life and did not
associate with any Japanese employees. Spending only a few years in
America, the Japanese officers had their own set of concerns and interests,
which I did not share, such as buying Japanese groceries and visiting the
Statue of Liberty.
By the same token, I did not associate with the American employees
because they were, generally, young women with limited interests--namely,
men and shopping. So my life during the week was basically a commute
between my home and the office. I no longer had any ambition to do well at
work. All I cared about and all I wanted was to recover the loss and leave
with a good record. Nothing more.
As the tension grew, in mid-1983 I made a terrible mistake. Until then, I
had been trading $10 million, but in desperation I doubled the size. First, I
bought $10 million as usual, hoping to capture 16/32 or so.
As soon as I put on the trade, I was called into a meeting with a
Japanese client. Afterward, my boss suggested I take him to lunch. It had
been an hour since I put on the trade, and I had no idea at what price it was
trading. This was like leaving a three-year old in an amusement park
unattended. If it turned out okay, it would be a miracle. If it began dropping,
I had no way of getting out. There were no cell phones in those days.
We went to a Japanese restaurant on Nassau Street for lunch. After we
ordered, I excused myself to use the restroom, but called Bill, the salesman
at Salomon Brothers. He told me the bond had gapped down a point when
the Fed did a customer Repo rather than the expected system Repo.
Another $100,000 was lost, bringing the total to $420,000. Bill said,
“It’s nonsense. This doesn’t mean they’re going to tighten. The market is
overreacting.” He was a junior salesman; a seasoned salesman would never
say things to pacify his customer. When a trader is wrong, the sooner he
realizes it and gets out, the longer he will be able to survive in the
treacherous environment of trading bonds. Every trader’s wish is to hold
onto his position a while longer and hope it will come back and make him
whole. If one takes a loss, the odds are theoretically 50/50 that the next
trade will be profitable, but if one can hold on to a losing position, the odds
are better than 50-50 that it will bounce back up.
Bill kept telling me how stupid the market was acting and how smart it
would be to buy more, because the market “should” go back up. His
rationale was what an amateur trader comes up with when he is faced with a
losing trade, and this is exactly what he must fight against.
Under the restricted situation I was in, I should have taken the loss and
gotten out, but Bill agitated me even more. It is hard enough to fight the
inertia of keeping a status quo and hoping for the best rather than
prematurely accepting defeat.
Knowing he was a junior salesman who had never traded bonds himself
and was saying these things to appease me, I still chose to accept his
scenario as support for my original hope of the bond moving higher. Not
only did I not get out of a losing position, I told him to offer me another $10
million to double up.
The bonds were down a point ‘irrationally’ and were bound to bounce
back, according to Bill. If that were the case, by doubling up I’d recoup my
loss if it bounced up just a half point.
Bill clearly had no idea how dangerous, and irresponsible, it was to
encourage a trader in a losing position—especially for a bond salesman at
Salomon Brothers, the most profitable bond trading house on Wall Street.
I took his encouragement as gospel and doubled up, telling him to sell
once the price came back half way, just to get me out. With this optimistic
strategy in place, I went back to the table and finished my lunch.
After leaving our client, I shot up to my office. Many were still out to
lunch. When I approached my desk, I noticed that my phone was ringing off
the hook. I sensed the caller had to be Bill. Perhaps my order was filled,
meaning I had sold out $20 million at the break-even price. Expecting
pleasant news, I picked up the phone.
“Tosh, oh my God, I am glad I got hold of you! Do you know what’s
happening?”
“What!” He didn’t sound good. Suddenly, I didn’t want to hear what he
was about to say.
“The market dropped like a rock after we talked. Now it’s trading at 93
13/32. You are down $400,000.” My mind went blank. I almost fainted. A
tingling swept through my body, as if I were being stuck with hundreds of
needles.
I had bought the first $10 million at 95 28/32. How could it be down 2
½ points in two hours? To see if there was any reason to hold on, I asked
him what had happened. “One of the Fed officials commented that inflation
was still a real threat,” he replied.
“That’s it?”
“Yeah, that’s it, nothing else. I guess the market didn’t like it, especially
coming after no system RP.”
I knew that when the market reaction was more than was warranted by a
headline, there was always something else going on internally, like
someone dumping a huge position. I told him, “Bill, I need to sell my
bonds. Get me a bid.”
“Just a second.” I heard him yelling to his trader, “Hey, Joe, give me a
bid on 20 bonds for Daiwa.” “Ahhhh, I’ll pay 12, 93-12!” someone yelled.
“Make it quick!” I heard the trader scream back. “That’s done, Bill. At 93-
12.” Bill didn’t know I had heard the whole conversation. “That’s done, Joe.
You bought $20 million at 93-12, regular settlement,” he yelled back.
After I hung up, I closed my eyes and meditated. I felt I had passed the
point of no return. I had really screwed up big time. Now I was down more
than $700,000. It became too much to hide, and too big to quickly recoup. I
had to do something, but I didn’t know what. Then, I realized there was
another problem that could become critical: The way Bill and the trader had
been talking, other people at Salomon Brothers must have also heard. A
salesman always mentions the client’s name over a loud speaker. My
concern was that Yamada, who had reportedly been trading T-bonds
actively at Daiwa Trust, might hear from other dealers that I was also doing
this. He knew I wasn’t authorized, so he’d see that something was amiss
and might blow my cover.
What happened next was far worse than that. Later that afternoon, Bill
called to tell me his manager was concerned about my loss. I told him there
was no problem, but what he said almost made my heart stop, “My boss just
left the office to talk to your manager. He should be there in fifteen
minutes.”
“He…wants to see my manager? What for?” I tried to remain calm, but
my voice was trembling.
“I think he wants to make sure everything is okay. You took a big hit.”
He had conveniently forgotten the great scenario he had preached.
“It isn’t necessary, Bill! What the hell….” My nerves were pounding
through my skin. I hung up, feeling ‘This is it.’ There was no way out. In
ten minutes, Bill’s boss would be talking to Mr. Ueba about the $400,000
loss I had just suffered.
I wanted to run and hide. I didn’t want to be here when Mr. Ueba denied
being aware of such a loss and my secret operation was revealed. In less
than ten minutes, my career would be finished with such a stigma that it
would preclude any future employment in the financial field.
Feeling so demoralized, I didn’t know how I’d be able to face my
family, my kids, and my parents. I was perspiring profusely, trying to
contain a rush of shivers that attacked me in waves. It was about 4:30 p.m. I
tried to prepare for the inevitable. When Mr. Ueba called me into the guest
room to explain, I would ask to discuss it in private. The last thing Daiwa
needed was to have an outsider discover an impropriety and spread negative
gossip.
Out of the corner of my eye, I saw Bill’s boss arrive. The receptionist
led him to the guest room on the opposite side of the office. My heart was
pounding so hard I wondered if others could hear it.
A minute later, Mr. Ueba walked out of his office toward the guest
room. He was an energetic looking man of forty-five, known to have strong
leadership ability, but he lacked a certain level of sophistication, especially
in the international arena. His English language skills also left much to be
desired.
 They spoke for ten minutes. I could picture Mr. Ueba shaking his head
and denying any knowledge of T-bond trades. He would adamantly deny
that we traded T-bonds. It was just a matter of time before I would be called
in to explain. I was prepared to confess everything and accept the
consequences. I would work two jobs or even three to support my family. I
would do whatever it took.
Finally, Mr. Ueba came out of the guest room and walked toward me. I
saw Bill’s boss leaving the reception area. My pulse quickened, but I
pretended to be working. Mr. Ueba stood in front of my desk. “Iguchi-kun, I
just had a long talk with a sales manager from Salomon Brothers. He said
you were a very good trader. Keep it up!” He walked away, apparently in an
excellent mood.
It happened so quickly I didn’t have time to react. Because I was so
certain of the outcome of this meeting, what I heard made no sense. It was
not even in the realm of possibility. It took a good twenty minutes for it to
sink in; I had avoided disaster after a very close call. And a month later, I
was promoted to assistant vice president and given authorization to approve
all money transfers and entries into the general ledger of the bank.
Now that I had received another chance, I needed to re-assess the
situation and do things right, because my window of opportunity was
narrowing with every passing day. The problem with my trading style, if it
could be called it a style, was that I had been so hard-pressed to make
money quickly that I was too afraid of missing an opportunity and was not
thinking things through. I was not giving trades enough chance to work.
As I didn’t want to accumulate too much loss, every time the market
went against me a half point, I took the loss and got out. I ended up taking
more losses than profits. Ironically, the majority of my losing trades would
have been winners had I given them more time.
Another element I had to consider was that each time I closed out a
position, I had to settle the difference with a dealer, either sending out the
loss or receiving the profit. Recording these transactions as money transfers
for the bank was potentially risky.
To resolve this problem, I decided to use what was called a ‘dollar roll’
method, which enables a position to be carried for months without settling.
It is a form of repurchase agreement, or repo, which is nothing more than a
loan with T-bonds as collateral. If I buy $10 million worth of T-bonds but
have no money to pay for it, I would ask the dealer to lend me $10 million
cash to pay for the purchase with the T-bond I had just purchased as
collateral. So, in essence, after the trade, I don’t pay any money and the
dealer keeps the bonds as collateral for the loan.
Instead of settling trades each time, I began keeping my position as long
as I needed without putting out any money. The purchase amount for the T-
bonds I bought was financed in repo transactions in which I would borrow
money against the bonds. With this method, theoretically, I could own $100
billion worth of bonds without putting up one penny.
I felt pressed for time; it was essential to end my clandestine operation
very soon, or Yamada at Daiwa Trust would hear about my T-bond trading.
By the end of 1983, I was carrying more than a $70 million position. I
hadn’t realized the market could go in one direction for a protracted period
of time, which was happening that fall. In this environment, cutting the
position with a small loss was essential, but because I had seen over and
over again during the previous six months that the market always came
back after a sell-off, I took a longer-term view and added to the position
each time the market went to a lower level. Although I hadn’t paid for the
loss, it was soon over $2 million.
To reduce the chance of my colleagues hearing about my trading T-
bonds, I decided to obtain approval for T-bond trading at the New York
branch from our headquarters. This was feasible; Daiwa Trust had been
trading T-bonds with a $3 million limit. But headquarters was not receptive
to my idea because they didn’t think the managers in its NY branch were
capable of managing such an operation.
They were right, but I wouldn’t admit it. Instead, I argued that Daiwa
Trust had been successful trading T-bonds. Wanting to enhance his
performance, Mr. Ueba also put in a favorable word, and headquarters at
last approved our T-bond trading beginning April 1, 1984.
In early 1984, I heard that Yamada had made a several million dollar
profit from trading T-bonds during 1983. I could not figure out how this
could happen with a $3 million limit. He had to have been a genius to pull
off a feat like that. I used to see him at company parties, but he always
looked depressed and had bloodshot eyes.
One day, when I was talking to the salesman from First Boston about a
repo transaction, he said, “Yamada has a $39 million repo with us.” At first,
I thought Daiwa Trust must have repo’d out their portfolio of Yankee bonds
to raise some cash, but as we continued to talk, I found out these were T-
bonds he had purchased to speculate on the market. This was a very
significant discovery, filling in a missing piece in the puzzle of his
incredible success and also explaining why he had not reported my
unauthorized T-bond trading. It had mystified me, because he was using the
same dealers. Although they were not supposed to divulge privileged
information to third parties, he must have heard of my T-bonds trades. The
bulk of his trades were executed by Goldman Sachs, and I knew the
salesmen there very well. It was unthinkable that my name had never come
up. Obviously, Yamada knew I had been engaged in unauthorized trading,
but he couldn’t blow the whistle because he was also trading way over his
limit. I would have given my eye teeth to know the depth of his
predicament.
During the early months of 1984, the market continued to move lower,
and my losses were snowballing. I did my best to cope with the pressure.
By this time my whole existence was a lie. The things I owned, my home,
cars, clothes, and furniture, and the way I was perceived, as a successful
businessman, a capable department manager, a model husband, and an
exemplary father, had all become lies. In an attempt to save face over the
loss of $70,000, I had ruined everything. In my despair, I prayed for help:
“Please God, I’ve done wrong, and am being punished for it. I’ll take
whatever I deserve, but don’t let my family suffer for my mistake.”
My children radiated happiness, but I was petrified at the prospect of
them losing this when my transgressions were uncovered. My wife was
frustrated with my anti-social and grumpy demeanor. I tried hard not to
show how depressed I was, but she must have sensed something was
wrong. I asked myself why I couldn’t have been a cabinet maker, a
landscaper, a teacher, a policeman, or an editor.
In no other profession could a slight mistake lead to losing millions of
dollars and ruining everything one had worked for. For that matter,
supervising the securities custody department wouldn’t have put me in this
position; it was trading securities.
Had I been trading for Salomon Brothers or any other institution, I
probably wouldn’t have gotten into this mess with strict internal controls:
No trader could settle his own trades there without anyone else knowing.
The extraordinary laxity in Daiwa Bank had allowed me to get into such a
jam. Most likely Yamada was in a similar position as well. How bizarre was
it that two U.S.-educated Japanese officers operating independently ended
up in the same situation.
I didn’t have any proof Yamada had lost money, but his carrying a $39
million position on a repo without authorization indicated he was hiding
substantial losses. I felt sorry for him and for myself as we were the only
two U.S.-educated employees of Daiwa who were capable of handling
trading. We were both doomed because there was no way out other than to
keep playing until one day we either hit the jackpot or someone discovered
the truth.
But my losses were spinning out of control. Since I began carrying a
long-term position by using the dollar roll, the market had been going
steadily down. The larger my losses got, the more daring I became. Money
lost its intrinsic value and became just numbers. On bad days, I would lose
two to three million, because by this time I was carrying more than a $100
million position. My trading volume picked up drastically after I was
authorized for a $3 million T-bond position. The bank finally leased a quote
monitor that showed real-time prices, and I was able to watch the market
move before my eyes. I was determined to hold my positions until they
came back up. The 30-year T-bond yield was above 13%. It couldn’t go
much higher; it was destroying the housing market. My plan was to hold on
until the market came up to the point where my losses would be recouped.
Not only wasn’t it unrealistic, but it was well within the realm of
possibility; all I needed was for the rate to go back down to 12%.
I began trading my $3 million bank-authorized limit, and was showing a
decent profit. It was easy to make $10,000 here and $20,000 there when I
could immediately act on the price I saw on the screen. When I started
trading throughout the day, I needed more assistants to handle the ever-
increasing volume of work. To house six clerks and various cabinets and
equipment, our department moved to a larger area. I set up shop in the far
end away from everybody, but my desk was only forty feet from the door of
the branch manager. Yet I felt no threat from him and believed that with my
unauthorized $100 million position, I was finally about to turn everything
around.
 Chapter 8

Flood
In the spring of 1984, our New Jersey town was hit by the worst flood in 80
years. I was awakened by a strange sound around 6 a.m.--a recurring
splash!
My son came running up the stairs, screaming, “Dad! Dad!” I jumped
out of bed and was struggling to guess what was happening as he yelled,
“The house is flooded!” I peered out the second-floor window and saw
surging muddy water covering the entire neighborhood.
Cars on the street were under water, some with only their roofs
showing. Starting down, I came upon three feet of brown water swirling
into our house and lifting up all the pieces of furniture that could float just
as the coffee table smashed into and through the back window.
The first thing that ran through my mind was not the damage this flood
might cause, but how I was going to get to work that day. Obviously, no
public transportation would be operating. But I had to get to the office,
because I had a total of $150 million worth of bond positions coming due
for a dollar roll. If I wasn’t there, five dealers would deliver T-bonds to the
bank against a payment of $150 million! And the bank would refuse to pay,
because it had no knowledge of these trades. It would be a real catastrophe.
With all the wall outlets under water, the electricity was down as well as
the phone. I couldn’t even check to see how bad the flood was, or if the
train was running. Since the railway system was elevated, it was possible
the commuter train would be running. At any rate, it was essential that I get
to a phone. But how? The water was over the tops of the cars parked on the
street, and it was impossible to tell how much of the town was
incapacitated.
Succumbing to desperation, I made up my mind to try wading through
the water, but then suddenly, I remembered that my son had a plastic boat to
play with in the pool. Sure enough, it was floating on its tether in the back
yard. I plowed through the murky water and found the plastic oar still
attached, so I climbed in and began rowing. Down the street across the
neighbors’ yards, I paddled two miles to high ground. Then I walked to my
son’s friend’s home and asked to use their phone.
I found out that not only was the train not running, but also all the roads
were blocked off. That precluded any chance of getting to my office. It was
already 8:30 a.m. The salespeople were at work, so I called seven dealers
one by one and explained the situation as my son’s friend’s parents shot me
curious looks. I asked each dealer to roll the position so I could settle the
following day. Had it been in the black or slightly in the red, they would
have just rolled it for another week, but this time the unrealized losses were
too large for them to ignore.
The rationale behind this was simple. When I did the roll, I borrowed
the funds to cover the purchase cost of the bonds. In return, they were
keeping the bonds as collateral. But the value of the collateral declined by
the amount I had lost. So I needed to pay back a portion of the original loan
equal to the decrease. The basic rule in a repo trade is that the collateral
should be 100% of the loan amount. They’d let it go if the value declined to
99%, but not 97%.
This time I was down by about 2.5%, and the dealers wanted me to pay
out the loss. However, because I couldn’t process the payments without
being in the office, I begged them to push the settlement date by one day. It
must have been obvious to them that I was doing everything by myself,
which was very unusual to say the least. We had to be the only institution
on Wall Street where the trader settled all trades. Nonetheless, no one
questioned this irregularity, and they accepted my plea because they wanted
to do me a favor. My business was too valuable to them.
It was almost 9:00 a.m. I was relieved that disaster had been avoided
and that I had bought one extra day. I rowed back home, wondering how
much longer I could continue juggling. Had it been only $70,000, I could
have hidden it for another two years, but not millions. In fact, I couldn’t let
the loss ‘float’ any longer. So, I devised a way to raise cash. But for now, I
had a lot of work waiting at home.
I paddled as forcefully as I could.
There was not much we could do, other than to move some furniture
upstairs. The water was expected to recede by late afternoon, and the public
transportation would be back in operation the next morning. What I hated
most was telling my wife I had to go to work the next day, because there
was a huge amount of clean-up to do. Knowing me, she would expect it, but
I felt bad for not being able to stay home like other husbands in the
neighborhood. By this time, she acutely resented my obsession with my job.
The next morning, I walked to the train station, which took about
twenty minutes. The track was just out of the water, but the parking lot had
a couple of feet. When I got to work, I called all the dealers to let them
know I was in and everything would be settled as promised. There was a
collective sigh of relief. I prepared instructions to pay a total of $5.7 million
to seven dealers, making sure no one was watching me.
Then I called another dealer, excluding these seven, to sell enough T-
notes to cover the loss. T-notes are U.S. Government securities that mature
in less than 10 years, as opposed to T-bonds which mature in more than 20.
My losses had reached $9.4 million, including the $5.7 million I would send
out that afternoon.
When the reconciliation clerk reported the unmatched items on his list, I
had noticed he put all the payments I had made in the past year on top, as if
to say these items had to be checked. They stuck out like sore thumbs.
Although no one in the bank was keen enough to suspect any irregularities
just from looking, the amount of the individual loss this time was too large
not to raise a flag. I had to think of another way to pay for the losses.
Several months earlier, one of our Japanese customers had purchased
$10 million worth of U.S. Treasury notes and designated us as his
custodian. Until now, we had held only stocks in safekeeping. When I saw
this, an idea flashed in my head: I could borrow their T-notes to raise
money in the repo market. The only hitch would come when they were
ready to sell them. Then I would have to get them back to make the
delivery. To retrieve them, I would either have to replace them with
different T-notes or pay back the cash. Since I didn’t have any cash, I would
have to have other T-notes. By this time, the same customer had purchased
a total of $35 million T-notes, so unless he sold them all, I would be able to
manage without getting into a jam.
All financial institutions send out a monthly statement showing the
balance of funds and securities they are holding for their customers. We
were no different, we sent a monthly ‘securities balance’ to our customers
in Japan. In those days, when we didn’t have computers, we manually jotted
down the balance of each issue from the record book and typed a report.
Our customers received a monthly statement showing all the T-notes they
owned.
 Unlike stocks and corporate bonds, government securities were kept at
the NY the Fed in a book transfer form, which means they were just
numbers on the books, not physical certificates. So, only the Fed member
banks were able to hold T-notes in their account. Since Daiwa was not a
Fed member bank, we piggy-backed on Bankers Trust Company (BTC) to
hold all T-notes and T-bonds for us. At the end of the month, they issued us
a monthly statement showing the balance of all our T-notes and T-bonds
holdings. If everything was in order, the balances on the monthly statement
from BTC would match the balances we had on our record book.
Well, they didn’t. After I borrowed $9.4 million in T-notes, there was
that much of a discrepancy.
Every month, because we didn’t have internal auditors, we checked
each other’s work. Japanese officers from another department came to our
department and counted the stock and bond certificates in the vault and also
reconciled the balance held at other depositories, like DTC and BTC. To
clear this hurdle, I had to create a phony BTC monthly statement to show
the correct amount. It was not hard to fabricate because BTC also manually
typed their monthly statements on their letterhead, but I had to do it after
everybody went home. Most of the time, I had to do it after 12:00 a.m.
From this point on, I always created my own BTC monthly statement.
The more Japanese products Americans bought, the more money
Japanese investors poured into U.S. securities, especially in bonds. Higher
rates and the strong dollar presented a safe and profitable environment.
Investment bankers were busy going back and forth between investors and
borrowers, but commercial banks were also getting a fair share of the
business through selling U.S. Treasury securities. Although they were
prohibited from dealing in corporate bonds, dealing in U.S. Government
securities was permitted as a primary dealer.
As the trading activity increased exponentially in the early 1980s, most
of the U.S. commercial banks beefed up their government securities
operations. Since Japanese investors primarily bought Yankee bonds and
U.S. Government bonds, commercial banks such as Citibank were busy
beefing up their international sales desks.
As I began trading regularly with Citibank in 1984, I became good
friends with the head of the desk, Dick Danbeck. Dick had worked for the
Federal Reserve Bank. A tall man in his 40s, he was one of the least
pretentious people I’ve ever met on Wall Street. Being in charge of
international sales, he made upwards of $300,000 a year. He told me that if
he did this for three more years, he’d have enough money to retire. He was
a breed apart from the typical Wall Street money-chaser. Most of the high
rollers on Wall Street firmly believed they were worth every penny they
made, but he told me candidly that what he was paid was insane. “But I
have no complaints,” he added.
One weekend, Dick invited my family to his home in New Jersey. He
owned an old farmhouse on a large parcel of land. He had a modest
lifestyle. Although his house was nearly twice as far as mine from
downtown New York, he drove in every day. To make his commute more
tolerable, he had purchased a Porsche 924 Turbo, the only luxury item he
owned. He’d leave home at 5:00 a.m. and be in the office by 6:30.
After dinner, while our wives were cleaning up, Dick asked if I would
consider joining his team covering Japanese accounts. He offered me a
$75,000 salary plus a 100% bonus, making the total package worth
$150,000 a year! At Daiwa I was making $45,000 then. This was exactly
what I had been waiting for. Had I not made the wrong judgment a year
earlier, I would have jumped at the offer. When I was assigned to a clerk’s
job in the securities custody department, I never dreamed that after eight
years the second largest bank in the world would offer me a $150,000-a-
year job.
The fruit of my efforts was being presented. The payday was here. My
family deserved it. But it had come too late.
Later, he told my wife about it, hoping she would convince me.
Naturally, she pleaded with me to accept. Somehow I had to convince her
that all that glittered was not gold, and it would be wiser to stay with a
conservative bank like Daiwa for now. Though I was very sad not to be able
to accept the offer, by this time, all I wanted was any modestly-paid job in
lieu of what I had.
This was the first time the U.S. financial industry felt threatened by a
force coming from outside the country. Japanese banks began picking up
speed in buying U.S. banks. For example, in 1983, Mitsubishi Bank bought
the Bank of California for $270 million, and Fuji Bank bought the Walter
Heller Group for $425 million. After getting burned with their unsecured
loans to LDCs, they decided the best way to increase their customer base
outside of Japan was to buy large branch networks of local U.S. banks.
 Meanwhile, American banks were going through a tough time.
Following a sharp drop in the price of crude oil, many loans in the Sunbelt
states were turning sour, as well as loans to oil-producing countries like
Mexico and Venezuela. Also reflecting the slower-than expected economic
growth, demand for agricultural products had cooled off, causing many
farms in the Midwest to fall behind in their payments.
Besides this general weak environment for commercial banking, the
removal of restrictions on bank deposit rates pushed more than 400 S&Ls to
the brink of bankruptcy. To provide new profit opportunities, the
government relaxed restrictions on the S&L’s business, which had been
limited to home mortgage loans. Responding to this decision, the S&Ls
swiftly shifted into riskier commercial mortgage loans.
The flurry of financial deregulation that began in the U.S. was really a
revolt by investors who felt they had been deprived of investment
opportunities. Because banks were considered the most essential part of the
economy by providing credit to businesses, the government had been
protecting them through various regulations, much like the MOF had
protected its Japanese banks. But while the regulators in the U.S. and Japan
were limiting the profit opportunities of investors in an effort to protect
banks, a more free and opportunistic financial market was being created in
London. It was called the Eurodollar market.
U.S. dollars held in banks outside of the U.S. were called Euro-dollars,
not held physically, but placed on the books of foreign banks. The Euro-
dollar market began with the Soviet Union and Eastern European countries
temporarily investing their dollar reserves.
In the mid-1960s, when U.S. companies went on a buying binge in
Europe, a large amount of the dollars were shifted to foreign banks. And
during the 1970s, following a surge in crude oil prices, Arab countries
invested their surplus dollars in the Euro-dollar market.
While the U.S. financial markets were bound by various regulations, the
wide-open Euro-dollar market grew by leaps and bounds. Interest rates on
the Euro-dollar were determined by supply and demand. Many
multinational companies in Japan and the U.S. used the Euro market to fund
their capital, and investors all over the world flocked to it to supply funds.
This development effectively forced the U.S. to deregulate its financial
markets, particularly regarding banking regulations. But Japan did not
follow, because, after all, the dollar was the currency used in all
international trades, not the yen.
In the summer of 1984, with my loss in excess of $20 million, the
market hit bottom, with interest rates at around 14% and bounced back up
sharply.
Before it hit the bottom, it fell straight down, and my loss nearly
doubled. When interest rates hit 14%, the mood among investors was so
bearish that some felt they needed to go beyond 15%, or even 16%. I
worried that if it were to unfold, I would not have enough T-notes to borrow
against to pay for the loss.
It made sense to get out of the market and see what happened. I simply
couldn’t afford to take any more risk, so I closed out all my positions. The
loss from doing this amounted to $18 million. Two days later, the market hit
the bottom (i.e. the interest rate hit the peak), and the market roared back. In
a week, it was four points higher than where I got out.
Had I held on, the loss would have been only $14 million. By
September 1984, the market had come back to below 13%, but I was afraid
to get back in on the long side, so I only put on small short positions from
time to time.
A rumor (later confirmed) swept through the Japanese banking
community that auditors from the Bank of Japan were investigating a
possible unauthorized trading loss in foreign exchange at the New York
branch of Fuji Bank, the second largest bank in Japan. Naturally, hearing
this filled me with fear. In 1982, there had been a similar incident in the
Singapore branch of the Daiichi-Kangyo Bank, where a trader lost nearly
$100 million in unauthorized foreign exchange trades.
The rumor was that the auditors might visit some other Japanese banks
in NY in order to examine their trading operations. I was told to keep all the
trade confirmations and records of transactions in place so the examiners
would be impressed. Despite this warning, they never came to our bank. We
later found out that a trader at Fuji had lost $150 million in unauthorized
trading. What puzzled me was how it had been possible to hide it until it
reached such a spectacular amount. I was able to conceal my loss only
because I had access to customers’ T-notes. Sometimes I wondered what
tricks these other traders had thought of that I had not yet discovered.
Gradually but surely, I felt the circle getting tighter and tighter. With
stories like these, the banking regulators would have to instruct the banks to
tighten their internal control measures and look for any loopholes and weak
spots in their operation. No sooner had I learned of this news, our manager
told everyone to look around to see if there were any irregularities in our
operations. As the concept of internal controls became more recognized, I
had to keep my eye on everything and everybody at all times. It had also
become my habit to look at our manager’s face first as soon as I got in the
office. If anything was wrong, I would know immediately from his
expression.
Sometime in late 1984 to early 1985, I met one of the biggest hurdles I
would have to clear. In addition to the monthly internal audit, Daiwa’s audit
department at headquarters sent a team to thoroughly inspect the branch’s
work. They were not career auditors, but were rotated into this department
as part of their education. Generally, they were a step away from becoming
a branch manager. Their main focus was on operations. They had the
official manual that had been prepared by the operations department at
headquarters. Every branch followed the same manual, except for the
overseas branches, which had to adjust their operations manual to allow for
local customs and restrictions.
The last time anyone revised ours had been in 1974. In ten years, no one
had bothered to update it because it was not in the interest of anyone at the
branch. Basically the auditors were there to find mistakes, not to improve
the system.
No matter how well an operation is run, they would find enough faults
to make their work invaluable. After two weeks, the head of the audit team
would give the branch a grade. On a scale of 1 to 5 (5 being the best), most
branches received either a 3 or a 4. They seldom gave a 5, because it was
impossible to be faultless. They also rarely gave a 2, because such a score
would embarrass the branch manager, who could become a director one day
and retaliate. After all, branch managers were evaluated on how much profit
their branch made. That being said, branch managers tried to get a favorable
report by urging everyone to tidy up the office when the time neared.
In late 1984, we were expecting the auditors to arrive any day. I was
very nervous because they did a thorough job. There were several risks, but
the two most vulnerable areas were the T-note balance and the trade
confirmations. For the balance, they might ask for the Bankers Trust’s
depository balance as of the date of examination. If they went to the BTC
on their own, I was dead. It was unlikely, though, because they didn’t speak
English. They would have to ask me to obtain it, in which case, I would
create it myself. As for the trade confirmations, the dealers issued a
confirmation ticket for each trade. That was no problem. I sorted them into
a pile of on-the-book trades and a pile of off-the-book trades. Naturally,
they would not see the latter. At any rate, I was extremely anxious because I
didn’t know how things would turn out.
One day, when I got to the office, five auditors from headquarters were
carrying all the stock certificates from the vault. They usually got into New
York on a Saturday, rested a day to get rid of jet lag, and showed up at the
branch before anyone else.
When the first employee arrived, he would find them waiting by the
door and ready to go on their raid. Once inside, they would look around to
see how neatly everything was kept and open the drawers to see if anything
of value was stored in an unsecured manner. Then, they would check the
valuables, such as cash, securities, promissory notes, bills of lading, and so
on. They would open the vault and bring everything out. Ninety nine
percent of the valuables were securities, because we had no cash.
They were busy counting certificates when I went to greet them and see
what they looked like. They were mostly in their forties, short and skinny
with black hair, neatly trimmed above the ears, wearing dark blue suits and
starched white shirts. I wanted to gauge the personality of the one in charge
of auditing my department. The result of an audit largely depended on the
degree of rapport with the auditor. Since the final rating would mostly likely
be a 4 (overseas branches always received 4 because of the difficulty in
maintaining Japanese standards when using local employees), they were
likely to overlook minor deficiencies for those they liked.
This one was friendly. In fact, as he started auditing our department, he
was apologetic because he had no idea what we were doing. The manual he
had read before coming to New York was so old, it was useless. He had to
ask me to explain each new aspect. The volume and complexity of our
operation had increased tenfold since 1974. Although I had no fear of him
coming near my secret, I intentionally guided him away from the T-note
balance. He didn’t even know we traded bonds, so I kept my mouth shut. It
was not on their agenda to audit the T-bond trading operation because their
manual didn’t mention that such an operation existed. After two weeks, my
department received an ‘excellent’ rating and the branch was given a 4, as
we expected. As far as the headquarters’ audit was concerned, I was safe for
two more years.
In March 1985, a strange thing happened: Yamada left Daiwa Trust and
began working as a trader at an investment bank. I was more puzzled than
envious. In 1984, he had reportedly made over $4 million, more than 80%
of the bank’s earnings. Although I believed the numbers were cooked, I
didn’t know if they had been cooked by Yamada or management. If they
had become aware of his impropriety, why had he not been fired? Nothing
made sense, but I couldn’t ask anyone. Everybody at the bank thought he
had simply been offered a better position by another firm and left. This put
me on more dangerous footing because now that he was out of the Daiwa
organization, nothing would prevent him from blowing my cover. But then,
why hadn’t he? Apparently, something was holding him back. The only
possible reason I could think of was that the management of Daiwa Trust
knew of his impropriety and let him go with an understanding that he kept
quiet. So, he elected to stay silent about everything including my possible
unauthorized trading. Whatever the case may have been, I had been spared
exposure.
High U.S. interest rates continued to draw Japanese investment in U.S.
bonds in 1985. As a result, the dollar was climbing quickly toward 250 yen.
The strong dollar encouraged more Japanese exports. (The exporters
received more yen for each dollar earned.) The more dollars the Japanese
earned, the more dollars they needed to invest in the U.S. to maintain the
balance of payments. As the exporters sold dollars for yen, the investors
bought dollars in order to buy U.S. bonds. This was a wonderful ratcheting
action for the Japanese, but a serious problem for the U.S.
President Reagan’s idea to reduce the government deficit by cutting tax
and spending seemed to backfire. A large tax cut and high interest rates
caused the budget deficit to soar, while the strong dollar exacerbated the
trade deficit. A “twin deficit,” as it was called, was threatening the future of
America. The trade deficit against Japan had jumped from $10 billion in
1980 to $25 billion in 1984, while the status of a creditor nation, which the
U.S. had enjoyed since 1914, was about to be taken away. The U.S. began
issuing billions of dollars of T-bonds and T-notes to finance its budget
deficit. Ironically, the Japanese were buying more than half of these
securities. The net effect of all this was that the Japanese were buying U.S.
bonds, and Americans were buying Japanese cars and TVs. What was
wrong with this picture?
Many U.S. economists and politicians began expressing their concern.
Most saw the problem in the dollar/yen exchange rate. Treasury Secretary
Donald Regan urged Japan to open its financial markets through more
vigorous deregulation, to alleviate the upward pressure on the dollar. The
dollar continued to climb through 1985, reaching 260 yen in February.
Finally, in September, the finance ministers of the G5 nations (U.S.A, Great
Britain, Germany, France and Japan) gathered in New York’s Plaza Hotel
and agreed to intervene in the foreign exchange market to push the value of
the dollar lower. It worked better than most expected, and by December of
1985, the dollar had declined to 200 yen.
At the beginning of the summer of 1985, I tried to take stock of my
situation. In the previous year, I had survived a flood, overcome the
problem of financing my loss by dipping into T-notes, and gotten through a
potentially devastating audit. Yet I could not take any comfort, because my
loss had passed $30 million and I was almost working myself to death.

1984 A year before our divorce. I was already engaged in unauthorized trading to protect my family.
My loss was about $8 million.
 Chapter 9

Breakdown at Home
On July 4, 1985, instead of heading for the Jersey shore, my wife solemnly
announced that we needed to talk. I wasn’t surprised, because we hadn’t
being getting along for some time. For more than two years, I had been so
consumed with worrying about my secret trading that I had not been
attentive to her emotional needs. Except for working excessive hours, I
thought I had been playing the basic role of a husband relatively well by
providing for my family. However, I hadn’t had enough energy left to share
any joy of life with her.
I sat in front of her on the bed, anticipating a mixture of complaints,
requests, warnings, and an ultimatum. I felt like a boxer expecting some
quick jabs. But her words were more like a knockout punch: “I don’t love
you anymore, and I want a divorce.”
My mind went blank. This had happened so suddenly that I didn’t know
what had hit me. I responded with no emotion, saying only, “All right, but
why?” I didn’t want her to see how much I was hurt. She couldn’t imagine
how badly I was suffering as she knew nothing about the terminal disease
underneath. Then she decided to throw a second punch: “There’s someone
else.” It was a finishing uppercut right on the tip of my chin. She said it as if
she wanted me to be happy for her.
I acted as though I was indifferent, unaffected by her disclosure.
Actually, I didn’t really feel any pain because I was in shock. But when I
got in the car and drove to a deserted parking lot, the pain gradually
permeated throughout my body.
Within a few minutes, I was a broken man. Ever since we had moved
from Missouri, she had been my only friend. We’d worked hard to get
where we were, raising two wonderful boys. She was a great mother and
wife. Digging the basement by hand until she was seven months pregnant
was just one of many examples of our shared commitment. She was a
tough, dedicated, intelligent, and loving wife. To protect her and my
beautiful children, I was willing to do anything.
 They were all I had and all I ever wanted. But now I discovered that my
wife was no longer mine. My desire to protect them drove me deeper into
my improper actions at Daiwa, which made me perpetually depressed,
indifferent and closed, and that ironically resulted in losing them.
When I returned home, everything was different, as if we were already
divorced. Besides, she was in love with someone else. She explained that I
had been so far away from her emotionally that she had felt alone for a long
time.
I had lost her. Until a few hours before, I had thought we would always
be together, but she was no longer mine. How had this happened? What
about the kids? “He said he would take care of the kids, too,” she informed
me, as if it would alleviate my concern.
The next day, I went into the anger stage. Feeling betrayed, I pounded
my desk with my fists until I realized my co-workers were staring. I had
thought only about the welfare of my family, keeping the fact that I was
living in a personal hell so they wouldn’t suffer.
Now she told me some other guy was going to take my wife and kids.
Just like that. The family I had worked so hard for. Then what was I? Where
did I fit in? Being fired as a husband and father made me angry at her. “Let
me meet this guy,” I demanded as soon as I got home. “No decent man
would steal someone else’s family. He’s got to be a scum-bag.”
She agreed, and I met the guy at a Burger King. He was a tennis pro, a
part-time contractor—a sure loser by my standards, who had the audacity to
say, “We love each other, Tosh. You weren’t there for her when she needed
you.” This creep knew more about my married life than I did. “Who gave
you the right to invade someone else’s marriage?” I demanded.
“Why didn’t you go after someone who was free?”
“Look, I’m sorry it worked out this way for you.” He sounded like a
dealer comforting me after a bad trade. “But you can’t change the fact that
we love each other.”
“What the hell is that supposed to mean?” I demanded. “You couldn’t
possibly fathom the depth of our relationship. We’ve been building our life
together for eleven years, coming of age together and raising our children.
What the hell do you think you know about her after a few tennis lessons?”
I was angry, but rational enough to know punching him wouldn’t change
anything.
 In the midst of all this, I still had to go to work. My loss had
mushroomed to over $45 million. Had it not been for the phenomenal surge
of investment in U.S. T-notes by our Japanese customers, I would have
been forced to give up. However, by this time our customers had bought
more than $200 million. In addition, we also got a new customer who
transferred over $500 million in Treasuries to us. There no longer was a
possibility of running out of T-notes to borrow against to raise cash.
Because our department was generating so much activity and fees, my
position in the branch had been strengthened and was now almost
unchallenged. I took all this as a sign that I was supposed to continue.
For several days, my mind was filled with memories of the good times
we’d had. It was as if she had disappeared. To me, my wife was dead, at
least conceptually. Since I’d met her in my third year of college, she’d been
the one I’d turned to every time I felt sad, angry, confused, or happy. I had
confided in her. She had always been there, and I had never imagined losing
that. The comfort of knowing she would always listen to me was gone. It
was ironic that the very person who had provided so much comfort was
now the one causing such pain. Without my only emotional support, I was
absolutely miserable. Every hour or so, I had to run into the bathroom to
cry. The more I thought about the happy days, the more shattered and lost I
became.
This, coupled with the pressure from my losses, gave me no reason to
go on. I began thinking about how to end my life. It would be so peaceful to
just lie down and die. It seemed the only way out, and I couldn’t wait to get
rid of my overwhelming anguish.
Yet, while part of me was craving oblivion, another part was trying to
hold on. Out of desperation, I went to see a marriage counselor. I needed an
ally, someone who could tell me I was right and she was wrong. I wanted to
know if there was anything I could do to change her mind.
The therapist I chose was a psychiatrist. I admitted I was considering
suicide. He wasn’t surprised; he probably heard this too many times to
remember. I told him what had happened without mentioning my problems
at the bank. Contrary to my expectation, he showed no interest in either my
marriage or my wife. Instead, he kept asking about me.
“Look, I know myself,” I said. “I know what my problems are. There is
something seriously wrong with my life, but I can’t tell you. I came here to
find out if there was any reason to go on and if you thought it would be
possible to get her back.” Instead of answering, he asked me to tell him
about the problem at the bank.
“It’s too serious to tell you,” I replied. I didn’t think it was any of his
business and didn’t like where he was going.
“It’s your choice to tell me or not. But without knowing what’s making
you behave in the way that made your wife feel alienated, there’s nothing I
can do, and you are simply wasting your money.”
“It’s about my work,” I offered. “I am not doing very well there, and I
feel terribly depressed about it.”
“Have you considered changing your job?”
“I can’t.”
“What do you mean you can’t?”
“It’s not possible. I know it sounds strange, but I’m caught in a bad
situation.”
“Does your wife know about this?”
“No, no one in the world knows.” I tried to stress the seriousness of the
problem without telling him what it was. But all this did was raise his
curiosity.
“Are you in some sort of trouble?” He looked sympathetic.
““You can say that.”
“How bad?” His eyes narrowed.
“You really want to know, don’t you?” I asked.
“I can’t help you unless I know exactly what’s bothering you.”
“As I said, no one in the world knows about this.” Unconsciously, I
wanted to tell someone and was hoping he would drag it out of me.
“Whatever we discuss doesn’t leave this room.”
“You don’t even tell your wife?” I countered. I could see him saying to
his wife, “Honey, guess what a client told me today?”
“Even my wife.”
“So, if I tell you, you may be able to help me with my marriage.”
“Maybe, it’s up to you.” I hated the elusiveness of his answers.
“Okay. I am a trader at the bank. I have lost a lot of money, but no one
knows about it.”
“How much is a lot?” He couldn’t hold in his curiosity.
“A lot.”
He kept after me: “Hundreds of thousands?” ‘A lot’ could be a relative
term.
 “A lot more, but that’s not the point.”
“So why don’t you report it if you don’t think you can get out of it?”
“If I report it, I’ll be fired, and I’ll never work on Wall Street again.”
“Is it that bad?”
“Yes, I may not get a decent job ever again. My family would lose their
lifestyle.”
“Well, they’d have to make some adjustments, but that’s not the end of
the world.”
“That’s easy for you to say. But it’s not acceptable to me. My family is
all I’ve got. They are the reason I exist. To see them happy makes me
happy. That’s all I want.”
“You don’t think they’d be happy if you were a carpenter?”
“I suppose not. In fact, I wish I were a carpenter. But I can do better,
and I should. My family deserves it.”
“In other words, your value is only confirmed by how well-off your
family is.”
“Something like that. I guess this is the way all men were taught to
think when I was growing up. You must be all you can be. After the war,
Japanese men were ant-like working night and day just to feed their
families. Except for a handful of wealthy people, everybody was
impoverished. Everyone stood at the starting gate with nothing, except
some who had an education. My father only finished grade school and then
the race began for him. The success of a man was measured by how well he
could provide for his family. My father’s original goal was to send his
children to high school. But by the time I was in high school, he had started
his own export business, and he told me I was going to college. For him,
being able to send his son to college was the ultimate proof of his success. I
was his source of pride. I was the fruit of his hard work.”
“So, to be fired and branded as a failure would destroy your father?”
“Absolutely, besides, the bank only hired me because my father had a
business relationship with them.”
“You mentioned you didn’t want to see your family suffer. Is that more
important than disappointing your father?”
“It’s the same thing. I guess he, too, is part of my family.”
“So, you aren’t going to do anything about this problem at the bank?
You know someday someone will catch up with you.”
 “Not if I can recoup the loss, which I still think is possible. But if I lose
my family now, I can’t go on.”
“Well, our time is up. If you’d like to continue with therapy, make an
appointment for next week with my receptionist in front. If not, good luck.
Oh, don’t forget to leave a check for today. Thank you.” I left without
scheduling another session.
A few weeks went by and fortunately her infatuation with this man
seemed to have subsided, which brought her the reality of living on her
own. We sat down one night and decided to give ourselves one more
chance. Since the problem was with me, I had to do most of the work. I was
motivated to change myself, especially to be more outgoing and
affectionate.
After several months, I realized I couldn’t become someone I was not,
although my wife seemed happy I had apparently changed. One day, on the
way to work, I stopped the car on the side of the street and suddenly began
crying. I asked myself, “What the hell are you doing?”
I was miserable because I was trying to be someone else so she would
accept me and stay with me. The joy of being back with her had
disappeared, and my ego began asserting itself. As soon as she sensed I was
falling back, our relationship began cooling off rapidly. After three months,
we had erased all of our previous gains. This time, the parting was mutual.
There was simply nothing left.

1985 Securities Custody Department (left front). My loss was at $25 million.
1986 After my divorce, with my sons. My loss was at $100 million.
 Chapter 10

The Downtown Office

When my marriage collapsed, I was determined to lose myself in the quest
to recover my loss. After that was solved, I could rethink my personal
situation. I had to keep my ruse going because now I was required to make
child support and alimony payments. Suicide was no longer an option as it
would only hurt my children, as my ex-wife was not able to support herself
without my financial support.
At thirty six, all I had accomplished was to lose an astronomical amount
of money, nothing else. My existence was nothing but a big lie and only I
knew it.
In February of 1986, I moved into an apartment in Secaucus, NJ, which
was much closer to New York. After a nerve-wracking day in the office, I
would come home to a dark studio apartment. Every day, I watched a video
tape of my kids playing in the yard. Now they were nine and seven, my
pride and joy. They gave me the only reason to live and to keep up my
pretense.
Earlier in the year, our department was finally computerized though I
had resisted it. The idea of keeping computer records scared me at first
because it could make my clandestine operation more difficult. But the
rapid increase in transaction volume and the general trend required us to
end our decade of manual bookkeeping. To continue undetected, I had to
make some adjustments. Despite the transformation to computer use, the
two most important segments of my operation were still done manually:
reconciliation (checkbook balancing) and the Bankers Trust’s monthly
statements.
By this time, our department was responsible for nearly 60% of the
branch’s money transfer activities. The reconciliation clerk was so
inundated with mismatched items that I was helping him ‘wash out’ some
of them. A sudden burst in bond settlement activities was affecting
everybody on Wall Street. Bankers Trust Company (BTC)’s custody
department simply couldn’t keep up with our activity, so our account was
assigned to the securities clearance department, which handled Treasury
trade settlements for Wall Street dealers. As Treasury securities (T-bills, T-
notes, T-bonds) became a primary instrument for short-term trading, most
of these custodian banks found themselves unprepared to deal with this new
environment. This was evidenced by the BTC’s monthly balance
statements, which were manually typed because the securities clearance
department didn’t have a computerized balance monitoring system. It was
not difficult for me to change the balance of one issue from 10,000,000 to
50,000,000.
It was an extraordinary time. The world financial markets were going
through a metamorphosis. A tide of deregulation, prompted by the revolt of
world investors, was changing the way Wall Street did business for good.
And there were the Japanese banks. Equipped with the huge savings of the
Japanese people and ever-increasing unrealized profits on stocks, they
expanded their business onto American soil. But while Daiwa was going
great guns, my life was on the rocks. More and more, I felt I was only going
through the motions.
The way our business was growing, it was just a matter of time before
our office space would become too small. Consequently, moving the office
to midtown was being discussed at headquarters. The most popular idea
was to join the NY Branch and Daiwa Trust in the Time Warner Building at
75 Rockefeller Plaza. Another possibility was to transfer my department to
Daiwa Trust, to which I strongly objected. I couldn’t allow the securities
custody department and the T-bond trading operation to be separated.
Needing to oversee both functions to keep my secret, I told them I had no
intention of going back to being an operations manager. They knew the
department could not run without me. By relying on one person to serve
two distinctly separate functions for so long without training anyone else,
they had put themselves in a tight spot.
Headquarters sent a relocation application to the MOF. When it was
approved, I was informed we were moving to midtown. “That’s not
possible,” I told my boss. “To conduct a securities custody business, we
must be downtown. According to the NASDA rule, we have to be located
south of Canal Street to receive the delivery of physical securities.”
Deliveries of physical securities were still conducted by messengers on
foot. With this new revelation, Daiwa had to alter their plans. Since it had
obtained approval for a change of branch location from the MOF, it couldn’t
cancel the move. There was only one solution: to leave my department
downtown.
Headquarters submitted a second application to the MOF to set up a
securities custody servicing office downtown. They explained that the
presence of a small custody operations office was required downtown to
receive physical securities. Because the MOF permitted Japanese banks to
have only one branch office in each state, they made it clear that the
downtown office was not a branch office but an operations center. The
MOF’s approval was granted, on the condition that this office would not
have any branch functions, such as funding, buying and selling assets,
foreign exchange, making loans, or money transfers. The bank also needed
to obtain similar approval from the New York State Banking Department,
the regulatory authority overseeing our operation. It also approved this with
similar conditions.
In September of 1986, the NY branch moved to its midtown location,
and my department was left alone in the old space. Stationed downtown to
run the department were three Japanese officers, my boss Masuda, myself,
and Araki. We oversaw eleven local employees. Our office was completed
in three months in the space which used to be the stock room.
By this time, we were holding more than $3 billion in stock and bonds
in safekeeping for our clients. When I started ten years before, the
department generated $220,000 a year and held less than $20 million in
securities.
At this point, the NY branch management committed a regulatory
violation by letting me continue to trade T-bonds at this downtown office.
They asked me again to move to midtown for this, but I told them the
securities custody department could not function without me.
They could have told me not to trade T-bonds in the downtown office,
but they didn’t want to lose the profit I was generating. It was only $3
million a year, but they chose to ignore a condition set by the MOF and the
New York State Banking Department. Because of this, the management of
the NY branch wanted to keep the existence of the downtown office at a
low profile. Many Japanese banks didn’t know Daiwa had a small office
downtown that generated more than 40% of its profit. But ironically, many
Wall Street dealers knew that a Japanese trader traded several hundred
million dollars in T-bonds every day out of this inconspicuous place.
 In an ordinary time, someone would have questioned my trading. It
didn’t add up. By this time, I was carrying a position of over $300 million.
With a 10% move, the P/L could swing $30 million. With the annual gross
profit of the NY branch being only $27 million, the size of my trading was
completely out of whack. But no dealers questioned my authorization
because I was with a Japanese bank. The mood on the Street was to ‘let
those Japs spend everything they’ve got.’
From September of 1985, after the Plaza Accord, to September of 1986,
the U.S. dollar declined from 247 to 154. In terms of yen, Japanese
investors lost 40% of their investment during these twelve months. Despite
this, they continued to invest in U.S.-dollar assets. Their only alternative
was to convert the dollars earned from exports into yen, which would drive
the dollar even lower.
Everything ran smoothly for a few months, but then a serious problem
arose. We needed to have our own money transfer function because
midtown’s money transfer department could not handle our volume.
Although this would be another violation of the conditions of our office,
management saw no alternatives and gave it to us. Within a few months, our
customers’ trading activity was surging, and it became necessary for the
downtown office to have its own separate checking account at Bankers
Trust. Until this point, the NY branch had one checking account at BTC,
and the reconciliation clerk in the midtown office was reconciling actual
movements of money against the bank statements. However, due to the
enormous amount of mismatched items, he literally gave up. So we opened
a new account at BTC and began doing our own reconciliation.
With these additional functions, this inconspicuous renovated operations
office had a complete set of banking functions. I had under my control the
ability to trade any amount of securities, the ability to raise any amount of
money (at least up to $3 billion), and the ability to transfer any amount of
money out to whoever I wished. In essence, I had the ability in my hand to
break the world’s 19th largest bank at will. It was not a hypothetical
scenario but a very real condition that actually existed and no one inside or
outside of the bank saw anything wrong with this.
In late 1986, the auditing team from Japan visited us again. Because we
were separated from midtown, only one auditor came to our office. I knew
him well. He had been working at the branch when I was hired. We
reminisced about the old days while he counted the stock certificates in the
vault. Daiwa’s downtown office had become a big blind spot for regulators
and auditors. The New York State Banking Department also conducted an
audit every two years. Their auditors naturally went to the midtown office.
During the course of the audit, they were told there was a small custody
operations center with fifteen people downtown. Most auditors didn’t ask a
single question about the downtown office, and none of them ever paid a
visit. Talk about being a blind spot!
While this was going on, I had been trading more and more aggressively
to recoup the loss, but I developed a counterproductive pattern: When I was
up, I would wait to make more, and when I was down, I got out in order to
limit the loss. I was letting some of the winners turn into losers, and the net
effect was a steady increase in the cumulative loss.
Finally, in December of 1986, I decided to come clean because the
pressure was too much to take. I was always nervous, rarely slept through
the night, and was so preoccupied that I could not carry on a normal
conversation.
Mr. Matsui, the ex-general manager of the branch who had hired me in
1976, became a director of Daiwa Bank and was sent to New York again to
head Daiwa Trust as its chairman. One day, when I was in the midst of my
divorce torture, he came to my office and told me to be very careful trading
T-bonds. I sensed something in his eyes, but couldn’t pinpoint it. He was
like my father, in that he seemed concerned about my welfare. Talking to
him, I wanted to come clean.
When my wife’s lawyer tried to force the issue, I had written a ten page
letter explaining what I had done. I had kept it, and continued updating the
events so whenever I decided to confess, it would all be there. I had also
kept the confirmations to my unauthorized trades so if someone wanted to
reconstruct them to verify the loss, all the pertinent documents would be
there.
Since the Plaza Accord, the Japanese economy had been in a recession
due to a sharp decrease in exports. When the value of the dollar dropped,
the exporters received fewer yen for each dollar earned. For example, as the
dollar declined from 250 yen to 150, a $20,000 Toyota which had
previously fetched 5 million yen was now bringing only 3 million. Since the
manufacturing cost was in yen, not only were the profits wiped out but also
Toyota Motors would lose money selling cars in the U.S. The U.S. was
happy to stifle Japanese exports.
 In order to counter this export-led recession, the Japanese government
began easing its monetary policy, and by late 1986, the discount rate was
reduced to an all-time low of 2.5%. The Bank of Japan also frantically
printed yen to buy U.S. dollars in an effort to support the value of the dollar.
These two aggressive actions to create liquidity flooded the economy with
cash, and the Japanese economy began recovering rapidly. However, the
excess liquidity wasn’t helping exports. It was going into domestic
speculation, such as the stock market and real estate.
Since the price of a commodity is determined by supply and demand,
the price of real estate and stocks began to surge. These were the two most
price-sensitive sectors in Japan due to their limited supply. More than one
hundred million people live on an island no larger than the state of
California, 80% of which is mountainous.
As for stocks, with the MOF’s engineered a cross-holding system, banks
and businesses owned more than 60% of the Japanese publicly-held stocks.
So when this massive liquidity began chasing the remaining 40%, stock
prices soared, beginning Japan’s infamous bubble economy.
In early 1987, I decided to end my problem by taking the biggest
gamble of my life. Trying to recoup $3 million here and $5 million there
just wasn’t working. Down more than $80 million by this time, I went long
on 1,000 bonds. To buy $1 billion worth of bonds without laying out a
penny, I used eight dealers, buying $125 million from each. If the market
rallied 8 points, I was home free.
The dealers must have known I had a huge position, although each one
was only aware of $125 million--unless they talked to each other. Given the
size of the branch’s capitalization, it was outrageous, but no dealer had any
problem lending me $125 million. For all they knew, I was the only contact
person on the other side of the phone; they hadn’t met anyone else, nor had
they even seen my strangely renovated office. Yet no one questioned
anything because it was a Japanese bank.
For most Wall Street investment bankers, Japanese financial institutions
were a mystery.
Individual Japanese bankers didn’t seem capable of running a deli down
the street. The average Japanese banker at age 37 could barely speak
English. At 9:00 p.m., he left work and went home to a middle-class
neighborhood in New Jersey. He played golf on the weekend with his
colleagues on a public course. His wife and two kids in junior high school
usually spent their day watching Japanese TV or shopping at a Japanese
food store. He got one week of vacation a year, going to Disney World or
the Grand Canyon.
Collectively, the picture was quite different. For example, the world’s
top ten largest banks (ranked by deposits) were all Japanese. And they
controlled almost 10% of U.S. retail banking assets. The “Big Four”
Japanese brokerage houses (or investment banks, as they are called here)
bought more than 50% of U.S. T-Bonds during the Treasury auctions.
As soon as I finished buying all the bonds, the market moved up a point.
Each point meant $10 million. It was insane because the market fluctuated
by one to two points a day, so the bank’s P/L was fluctuating by $10-$20
million. While keeping this $1 billion position, I was also trading my
proprietary $50 million position. I knew this was going to be my last play.
If, for some reason, I failed to recoup the loss, I was going to report it to the
bank.
The market moved up some more, but pulled back again and my
position stayed in a range of plus-or-minus $20 million. As we got into
February of 1987, I noticed that the market was not reacting positively to
good news—not a good sign.
Slowly but surely, the tone became bearish. The bonds were acting
tired. We used a gorilla as a metaphor to explain the market condition.
When a gorilla is starving, he’ll eat anything. But as he gets full, he’ll
become picky and even spit out half of his banana. And when he is
completely full, he wouldn’t even touch a banana.
The bond market looked full; that is, investors were so heavily invested
in bonds that no good news could generate any more buying.
On the other hand, a piece of bad news swiftly drew a negative reaction,
like giving a banana to a gorilla when he was already stuffed. There were
indications the market was entering a period of correction or adjustment.
Nobody knew how long or how deep it was going to be.
By the time I realized this, I was already down more than $30 million.
Had my position been $50 million, I would have gotten out and tried to find
a better opportunity, but with the $1 billion position I couldn’t. Still, it was
a tough decision. The problem was that the market could potentially fall as
much as 15 points, according to the chart analysis. The dollar was
weakening again, hovering around 150 yen, and if it broke 150, Japanese
investors would dump all their T-bonds.
 My eyes were glued to the screen day and night. When I returned to my
apartment, all I did was watch the Tokyo market until I fell asleep in my
chair. Because the Japanese were the major players in U.S. T-bonds, Cantor
Fitzgerald began a night session around the clock so Japanese traders could
trade during their daytime hours. By this time, Japanese investors financed
30% of the U.S. deficit.
Cantor was the only broker to provide a trading platform for both
dealers and retail institutions. One difference between a broker and a dealer
is that a broker serves as a middleman between dealers. Brokers are much
like an exchange where traders can buy and sell by using a broker’s screen.
Cantor, however, provided a screen to all the institutions in the world
through an information provider called Telerate. So dealers and institutions
alike traded with each other on the Cantor screen.
One day, the head of our International Division and Akazawa, a senior
director at Daiwa, came by my office. Regarded very highly by the
president, he was full of confidence and was a strong leader. When I
showed him around, he said, “This is a disgrace. Have the general manager
request a budget to move to a larger space.” Not having seen such a
dynamic, charismatic man in this organization, I made up my mind that he
would be the one to whom I confessed.
In the spring 1987, the U.S. stock market climbed relentlessly while the
bond market sank fast. Something was amiss. Higher interest rates were not
hurting the stock market. Instead, the drop in bond prices seemed to be
fueling it. During the last several years, bonds and stocks had been moving
together, but since February they had markedly diverged. After a series of
slow declines, the bonds cascaded down sharply, dropping 8 points. Instead
of making $80 million, I was down $80 million, and counting. It hurt, but
my senses were already numb. In short order, the unrealized loss exceeded
$150 million.
The market began bouncing after the steep fall, but showed no sustained
positive move. After several weeks I felt very uncomfortable and forced
myself to get out. I had suffered a $100 million loss.
It took me about a month to be able to see what had happened. Had I not
gotten out then, I would have lost another $150 million because the bonds
fell an additional 15 points by the infamous Black Monday.
During this period, stocks soared while bonds tanked. Something had to
give. They were like rubber bands stretched as far as they could go.
Expecting the bonds to bounce and the stocks to fall, I bought back $500
million prior to Black Monday. But they continued to go down sharply, the
yield touching 10.5%. On Black Monday itself, after opening at 85 24/32,
the bonds fell another point or two in the morning.
I felt nauseated. The Dow had declined more than 200 points in the
previous two sessions, and the bonds were falling with it. It made no sense.
I was down another $30 million. But when the Dow’s fall accelerated, the
bonds stabilized and began moving back up. At the point where the Dow
was down, more than 400, everybody gathered around my desk. History
was being made before our eyes. When the Dow hit minus 500, there was a
genuine concern in the air. It was no laughing matter. But I was feeling
great because the bonds were up three points. To me, anything that made
bonds go up was welcome news, even if it was the beginning of a major
recession.
It was an historic day on Wall Street. Talk of a coming depression filled
the air. In the overnight session, there were no sellers of bonds. After
reaching 84 in the morning, bonds were trading at 92.
At that point, I didn’t see any reason to get out. The next morning, the
bonds were quoted at 97-12. When I asked my boss if he’d seen the actual
price, he casually said, “Oh, it was 95 or something when I got in, but it’s
gone up since.” I couldn’t believe it! The Street was expecting a further
dive in the stock market, and nervous shorts were panicking to buy back
their bonds. I decided to get out while buyers were abundant. As soon as the
market opened, I sold my bonds. I made $45 million on this trade, $75
million better than the previous morning. It was one of the few things I did
right.
Sure enough, stocks rebounded in the afternoon and the bonds pulled
back again, closing at 93. The rubber band had almost snapped back to its
original shape in only a few days.
While Wall Street was in a panic mode, Japan was in the midst of an
asset bubble. Stocks and real estate were caught in a classic supply
shortage, and prices were bidding up with no sign of a peak. After Black
Monday in the U.S., Japanese stocks experienced a knee-jerk reaction,
dropping 23% or so versus 30 to 40% in New York and London, but even
more amazing was that in two years, while U.S. stocks finally returned to
the pre-crash level, Tokyo stocks nearly doubled.
 The Japanese business community, which collectively owned almost
60% of the stock market, was enjoying unbelievable windfall profits. While
U.S. banks were prohibited from owning any corporate stocks by the Glass-
Steagall Act of 1933, Japanese banks were encouraged by the government
to own them. This was the major difference in the Japanese financial system
that was supposedly copied from the U.S. Although they had no intention of
selling these stocks, unrealized stock profits for the top 23 banks reached
$415 billion, five times their capital base. Furthermore, property values in
major cities continued to soar, and banks were lending to anyone who
wanted to buy and develop land. With unrealized profits on stocks and their
land (most major banks owned 150-200 branches in various cities) surging
daily, banks became more aggressive in lending ‘cheap money’ to
speculators.
Watching this development, the MOF feared the economy was
overheating and considered raising interest rates. However, Treasury
Secretary Baker strongly urged the head of the MOF not to raise interest
rates in Japan. He was afraid an increase would slow Japanese investment
in U.S. bonds and stocks, and other foreign money might find Japanese
markets more attractive than those in the U.S. The U.S. was in a precarious
position now, heavily dependent on foreign capital to pay for its twin
deficit. Recognizing this vulnerability, investors were fleeing the stock
market.
To pacify the U.S. Government on the trade front, it was agreed not to
raise interest rates. Despite a nearly 50% drop in the value of the dollar,
Japanese exporters had found a way to reduce their costs by moving
manufacturing plants out of Japan and continued exporting more goods to
the U.S. The U.S. Government’s discontent was not that Japan was selling
too many products here, but that they were unwilling to open their market
for American goods and services.
This development gave more speculation-related lending a green light
and propelled the price of stocks and land to unprecedented levels. It was a
vicious circle, but no one complained. Flooded with cash, Japanese banks
renewed acquisitions in the U.S.
To head Daiwa’s international operation, particularly in North America,
a new general manager named Kenji Yasui came to New York. Prior to this
assignment, he had served as the branch manager of our L.A. branch as well
as our London branch. He was known to be very aggressive in the
implementation of his vision. When he arrived in New York a few days
after Black Monday, he visited our Downtown office.
Walking directly over to my desk, he said, “I’ve heard a lot about you.
So how many bonds are you trading every day?” When he spoke, he had a
habit of staring into a person’s eyes from no more than six inches from their
face. I felt he was trying to see if I was lying.
“I have a trading limit of 50 bonds,” I told him, staring right back.
“Fifty bonds…that’s a lot. It must be tough to make money in this
environment.” Again, he looked right into my eyes.
“It sure is, especially since I have to trade while managing this
department.” I sensed that his concern was over my running the trading
operation all by myself.
“Would it be possible for you move up to the midtown office and start a
T-bond trading team?” he asked. Now he was only three inches from my
face.
“No, I’m afraid not, because this custody department will not function
without me. There are too many important decisions that the manager has to
make.” I scanned the office to get his face out of my view.
“I see. Then could you train another trader here?”
“Yes, in fact, I was going to ask you to give me a junior trader so I don’t
have to watch the market every second.” I said this to let him voice any
suspicion he might have about my operation. There was a reason I was
getting defensive. I had heard from Masuda that when someone asked Yasui
why his family hadn’t accompanied him to the States this time, he replied,
“Because I didn’t want to have them around if this thing blows up.”
Masuda told me Yasui had come to New York to take care of Daiwa
Trust’s trading loss. I was only guessing about Yamada’s unauthorized loss
until I heard this. But when I tried to dig out more details, he said he
couldn’t tell me. It was a secret within the management. So it was
understandable that he would be suspicious of me, since I ran a nearly
identical operation as Yamada.
Sensing that he is going to tighten the controls, I had to figure out
another way to trade. To trade cash bonds, you need to have cash
equivalents of 100% of the purchase cost; however, to trade futures, you
needed only 5%.
In futures trading, unless you take the delivery of underlying security or
commodity, you don’t have to pay for anything. You only have to have what
is called “cash margin” in your account. I thought this was a brilliant idea.
With Yasui being sent here to cover up Daiwa Trust’s unauthorized trading
loss, it would only be a matter of time before I lost all freedom to do my
unauthorized trading. So, all I had to do was to move my trading outside of
the bank.
To trade futures, I needed to open an account at a futures broker.
Naturally, I couldn’t open an account in either my bank’s name or my own
name, so I used my father’s name. I asked one of the bond salesmen to
recommend a futures broker. Luckily, his brother-in–law ran a small futures
broker in Chicago, but for me to trade my father’s account; I had to submit
a trade authorization form authorizing me to trade.
I needed to keep my name off of this account since I was fairly well
known in the bond market then, besides their compliance department would
not approve the account unless I provided an acknowledgement form signed
by my employer. So, it was technically impossible for me to open a futures
account and trade it.
This idea was the only solution to my immediate problem, although it
was unethical. I asked the salesman to do me a huge favor. When he
realized that it would be to his advantage to do me this favor, he made some
phone calls and got them to open the account. I just had to promise that I
would have nothing to do with the account and the person trading the
account was my father.
In the last week of December 1987, I transferred $520,000 that I made
in my last trade to this account. With a $500,000 margin, I was able to trade
$10 million worth of bonds. I was going to trade small for a month or so
and gradually build this account so that I could move all of my
unauthorized trading outside of the bank.
My futures broker was ecstatic when I told him that my father was very
wealthy and that this account could be very large but I asked him not to
disclose the fact that I was trading the account, not my father. He agreed.
Yasui didn’t waste any time scrutinizing my operation. First, he
appointed a Japanese officer to spend a month checking our back office
operation. My assistant, Jean-Marie, whose job was to confirm my trades
got very irritated as he stuck his nose in everything she was doing with a
typical Japanese condescending attitude toward females. Being a hot-
blooded Irish girl from Rockaway Beach, she didn’t give a rat’s ass about
his seniority. Every time they got in an argument, I feared that he was onto
something.

1987 Downtown Custody Operation Office

In the back of this office, I managed the operation and traded hundreds of millions of dollars worth of
bonds daily (in red circle).

1987 Immediately after the stock market crash.

This was Daiwa’s trading operation.
One desk and a phone. My loss was at $250 million.
 Chapter 11

Contagious Temptation
When Yasui met me at a Japanese restaurant a week later, I sensed that he
had something important to tell me. As soon as we sat down on the tatami,
he began confiding in me.
As strong-minded as he was, it was surprising to hear him adopt this
tone. He told me honestly that he had reservations about my trading
operations.
I pretended not to know what he was talking about. “You see, right now,
our trading operation is run by only you,” he explained, “by one person.
This is not how an organization should operate. If something happens to
you, we would have no one to carry the ball. So what I would like to do is
to integrate your operation into the branch’s operation.”
I knew exactly where he was coming from and told him that I agreed.
“It might make your operation somewhat ineffective, but this has to be
done to make it more a part of the organization than a one-man show.”
“I understand. So what would you like me to do?”
I felt my castle crumbling. A woman dressed in a kimono came to take
our order, but he ignored her and kept on talking. “First, I want to move the
back-office of your trading operation to midtown. It is essential to have a
separate back-office in any trading operation.” He was staring at me to see
if I would show any sign of defiance.
“That would be wonderful,” I replied. “So we’ll just trade, and midtown
will take care of the settlement.”
I said it as if that’s what I wanted. He was pleased. He looked at the
waitress and told her to bring ‘omakase,’ meaning “I leave it up to you.”
Japanese restaurants like customers who order this way because they are
basically saying that cost is not an object.
“I want you to name two people you are willing to train to be your
junior traders,” he continued.
“Okay, I think Araki would be one, and the other is in the Osaka
headquarters trading JGB (Japanese government bonds). His name is Yagi.”
 He wrote them down, saying, “Good, now we can build a strong trading
team under your command.” I kept wondering how I could work around
this. I felt like Houdini in a straight-jacket with chains and shackles,
hanging from a 40-foot crane and being lowered into a lake. Yasui was
challenging me. So far, he seemed convinced from my reaction that I was
clean.
He hadn’t finished. A month later, he hired two internal auditors. Until
then, our internal audit had been done by Japanese officers checking each
other’s work. However from this point on, these two professional auditors
were responsible for auditing us, department by department.
This was the biggest threat yet to my secret. I could have fooled a
couple of Japanese auditors from headquarters who used the ten-year-old
operating manual, but not these trained men. The Chief Auditor was a CPA.
They were scheduled to spend a month in our department thoroughly
checking every area. As if that wasn’t enough, a Japanese officer by the
name of Yauchi, who had been working in a room by himself in the
midtown office, was appointed deputy general manager in charge of
operations. He was to report to Yasui. We had no idea why he was here, and
we were shocked that he promoted himself to the #2 spot in New York.
Later, I found out he had been working on the Daiwa Trust problem. Yasui
put him in charge of all operations, and the two auditors reported directly to
him.
So, in the span of two months, Yasui managed to remove all the
freedom I needed to continue my unauthorized trading. By moving the
back-office operation to the midtown office, I would no longer have control
over settlements. The back-office clerk would be contacting the dealers
directly to confirm all the trades I did and trade confirmations would be sent
directly to the midtown office. In other words, I would no longer be able to
hide my unauthorized trades.
It was the first time since 1983 that I felt someone was actually
recognizing the major flaw in our trading operation. Because Yasui was an
instrument in concealing the Daiwa Trust’s $100 million trading loss, he
knew what was needed to prevent me from engaging in unauthorized
trading. Separating the front-office (trading desk) and the back-office (trade
confirmation and settlement area) would eliminate the possibility of a trader
altering or concealing part of his trades.
 In correcting the internal structure to prevent any future problems, Yasui
didn’t forget to make sure that I was ’clean’ by scrutinizing my operation
using his newly hired auditors.
In April of 1988, Araki was assigned to the trading department, and
Yagi came from Japan to join my team. They were three years younger than
I. To make room for a trading operation, Yasui had given instructions to
renovate our office by doubling the size, and now the renovation was
almost finished. Masuda and I were each given a private room, which made
it easier for me to carry out my subterfuge.
By this time, I had been doing futures trading outside but I hadn’t been
very successful. For one thing, I had been under a lot of stress with auditors
crawling around me, but mainly because I had no room for error. With a
$500,000 margin, I was trading 100 contracts or $10 million worth of
bonds. On any 5% move against me, I was wiped out. In those days, bonds
were fluctuating by 1 to 2% a day.
Knowing that building up this account was the only way I could
continue with my trading to recoup the bank’s loss, if the market did not go
my way, I would keep buying bonds in the cash market to move the bond
market so that the futures position would become profitable. However, this
strategy backfired on me and not only did I lose all the margin money but
also incurred even more losses in my unauthorized trading. This futures
account remained open for about a year but as it became clearer that I could
continue with my unauthorized trading at the bank, I decided to close it.
(Later, in order to protect the identity of my broker, I told the authorities
that I had embezzled $520,000 for my own use.)
Meanwhile, I dug deeper into the Daiwa Trust problem, and learned that
in 1984, when the MOF auditors had investigated the unauthorized trading
loss by Fuji Bank, the management discovered Yamada had been hiding a
$30 million loss. He had been carrying a $200 million unauthorized
position by using repurchase agreements (repos). When I found out, I
almost fainted. He had been in a parallel situation, and his secret had been
inadvertently uncovered. Daiwa Trust must have decided to keep his
impropriety quiet and let him go, as if he had left on his own. Had I known
the consequences would be this benign, I could have done the same.
Instead, I made bigger and bigger bets and almost ruined my life.
Surprisingly, Okamoto, Yamada’s boss, who was a proper employee
from Japan, took over the unauthorized trading operation, which was
acquiesced to and even blessed by the HQ’s International Division. It had
been gaining clout as the bank’s business became more globalized, and it
couldn’t afford any scandal. They were confident they could hide the loss
while they tried to recoup.
Unfortunately, things didn’t work out as they expected. Okamoto not
only failed to reduce the loss, but also it increased. This was not an easy
game to play. Since none of these losses were properly recorded, their
trouble deepened. Because Daiwa Trust was a U.S. bank and its deposits
were guaranteed by the FDIC, it was under the supervision of Federal
banking regulators. Any irregularities had to be reported immediately or
they’d be subject to a penalty. Well, it was too late. The International
Division reported the facts to the senior management of Daiwa, which
couldn’t find a solution that would not tarnish the bank’s image. They were
told to continue off-the-book trading to recoup the loss. This was when Mr.
Matsui appeared. No wonder he had been concerned about me.
Okamoto and one other person began trading again, only to go deeper in
the red. In the process, he himself began unauthorized trading to hide his
own loss. When it reached $100 million, the bank abandoned the futile
attempt and transferred it to a paper company in the Cayman Islands. Yasui
was sent to New York to detach this $100 million loss from Daiwa Trust
without alerting the bank regulators or the auditors.
So, it was perfectly understandable how Yasui felt so petrified of my
trading operation which was very similar in every respect to Yamada’s.
Without any let up in Yasui’s scrutiny, 1988 was unfolding as the toughest
year for me as two major audits were slated, one from the NY State
Banking Department and the other from Daiwa’s headquarters.
To top it off, Yasui asked me to accompany him to the overseas branch
manager’s meeting held in Osaka in October. He wanted to introduce me to
the senior directors of the bank. Leaving New York for a week with Yasui’s
dogs sniffing around my territory was extremely dangerous. Ever since
1983, I had not taken a vacation for more than four days.
Yet, as it is ordinarily the highest honor for any local employee to be
introduced to the senior executives of the bank, refusing to go would be
certain to ignite suspicion. So, I agreed to go.
In September, five auditors from the headquarters arrived in New York.
This time, because of more active trading activity, one auditor was specially
assigned to audit our trading operation. However, no irregularities were
found.
A week before I left for Tokyo, I found out that Yagi and Araki were
both losing more than $500,000 each and carrying a much larger position
than they were allowed. They were carrying these positions on repo just as I
was doing. As their loss was a fraction of mine, I sanctioned it. Not that I
was authorized to sanction such impropriety, but I was the head trader, so
they followed my advice and continued to hide it. My concern was not their
loss but how I would explain to them that I could take care of it. With so
many things on my mind, I left for Japan.
The meeting was to be held on the 9th, so I asked for a four-day
vacation to visit my parents in Kobe, which was about forty miles from
Osaka. I was to return in a week. To avoid discovery, I had not taken a long
vacation in the past. When I took more than a few days, I always stayed
nearby and called my people every day to make sure everything was under
control.
At that point, I was covering a $180 million loss with ten different
issues of T-notes in various amounts. The risk was that if the customer sold
the particular issue I had borrowed against, when our department instructed
the BTC to deliver them, it would tell the bank there were not enough in our
account. Since I could not predict when a customer might sell his T-notes, I
was always at risk of exposure.
My parents were happy to see me, especially my father. He was proud
of my invitation to headquarters to make a presentation. What a phony I
was. I had never felt so low. I couldn’t tell my own parents the truth. I knew
my mother could handle it, because women were more down-to-earth and
prepared to deal with reality. But my father would not be able to face the
fact that his son had lost $180 million of the bank’s money and belonged
out on the street rather than the boardroom at Daiwa’s Headquarters. I felt I
shouldn’t have come back to visit them, but it would have been unnatural
not to, since I only got to see them every few years. Besides, this might be
the last time I saw them for a long time— if I got caught.
To my chagrin, I was arrested the next day and detained by the Japanese
police. Not for the loss, but for running a stop sign. Driving in the
downtown area, I noticed a policeman running after me on foot. I slowed
down and pulled over. Out of breath, he politely said I had run a stop sign,
and asked to see my driver’s license. I hadn’t had enough time to obtain an
international license, so I told him I must have left it at home. He was
surprised I was not a resident of Kobe, and looked bewildered. After calling
the station on his radio he said, “I am really sorry to trouble you but can you
come to our station around the corner?” He got into the car and drove.
I didn’t know what to think. The international license was issued by
AAA, so there might not be any way they could prove I didn’t have it. They
put me in a small litigation room and contacted all sorts of places to verify
that I had a valid license. I was nervous, but whatever the case, I needed to
go because I had to be in Osaka the next day. I was willing to pay a fine to
get out, but it wasn’t that simple. Things never are in Japan.
A sergeant came in after two hours to explain why it was taking so long.
“It would have been easier if you were driving without a valid license,” he
said. “We could charge you with that. But since you said you were issued
one, we have to charge you with driving without carrying it. However, we
can’t even do that because we cannot verify you were, in fact, issued one.
So we are in limbo.”
“Well, if you can’t charge me, you might as well let me go,” I
suggested.
“Oh, we can’t do that. You did run through a red light.”
“So what are you going to do with me?” I asked, annoyed.
“In a case like this, we require you to go to a safety driving class for
three days at the Civil Traffic Center.”
“For three days? No, I can’t do that. I have an important meeting to
attend.” I leaned forward and raised my voice a little.
“What kind of meeting?” He adopted a skeptical tone.
“You see, I work for Daiwa Bank. And I’m being presented at the
Overseas Branch Managers’ meeting before the senior management.”
Suddenly he looked impressed, and his demeanor became friendlier.
“Oh, in that case, we can’t keep you,” he declared. “How can we verify
that, though?” He was thinking about how to write his report.
“You can call the Daiwa Bank headquarters and speak to Mr. Yasui, the
Senior Managing Director.”
“The Senior Managing Director? Oh, no, that’s okay. We don’t need to
bother an important person like that.”
That was it. Amazing. I had forgotten that this was Japan, Inc. and bank
executives were untouchable, almost like government officials. After five
hours I was let go with no charge, although for a while I was concerned that
this would produce a chain reaction of disclosures.
Three days later, I bid farewell to my parents and got on a train to
Osaka. My father complained that my shoes were not shiny enough for the
occasion, so I told him I would have them shined beforehand. My mother
hugged me and told me to come see her again the next year. I promised I
would.
I had my confession letter in my briefcase, now addressed to Mr.
Abekawa, the CEO. It was risky to carry it around: If I accidentally left it
somewhere, anybody might read it. But while I was in Japan I had to keep it
with me all hours of the day, because the moment I heard any word that
would imply there was a problem at the New York Branch I was going to
give the letter to Mr. Abekawa directly.
The meeting was held in a large conference room. The tables were
arranged in a square. One side was occupied by the overseas branch
managers. Across from them was the senior management. Mr. Abekawa
was in the center. The other sides were occupied by various division
managers.
After each branch manager reported on his performance and gave next
year’s projection, Yasui stood up and introduced me. “Mr. Iguchi has been
trading T-bonds very successfully for four years for our New York branch.
He is famous on Wall Street. I heard that some days the T-bond market
doesn’t move unless he gets in.” He said it jokingly, but it was true—except
only because I was trading a billion dollars, not the fifty million he thought.
How much I dreaded this moment! Beginning with my passive failure to
report a $70,000 loss, I had become a master of deception. Here I stood, in
front of the people from whom I had been concealing the truth, presenting
myself as their hero instead of a failed traitor. How hypocritical can one be?
It was not my nature to be either manipulative or deceitful. I had always
valued truthfulness. But since 1983, I had become the type of person I
found disgusting. I hated this moment with all my heart.
I reminded myself that the thousands of lies I had concocted had always
been passive. I would only lie when confronted, unlike the con man who
actively manipulated others to get what he wanted. I didn’t want anything
from these people. I didn’t need to stand in front of them and tell a
deliberate lie to achieve my objectives. They hadn’t asked me anything. I
was fulfilling Yasui’s objective, not my own. He was a charismatic leader
and manipulated others to achieve his goals. I was simply his pawn. I would
defend my secret fiercely if someone tried to uncover it, but I would not
actively seek to mislead anyone. I considered this my only saving grace.
After five minutes of hypocrisy, I left the meeting with a terrible
headache. Some younger men took me to lunch. Quite a few people
criticized Yasui’s unconventional way of ‘showing off’ his knowledge of
the new financial products. Many new ones had been developed as a result
of the financial deregulation of the 1980s, and while most of the domestic
directors had dragged their feet in keeping pace with the changes, he was
expanding the bank’s business in the overseas market with vision and vigor.
This semi-annual meeting gave him the perfect opportunity to show the
bank’s senior management who held the key to the future of Daiwa Bank.
With the confession letter still in my briefcase, I took a bullet train to
Tokyo to attend several meetings with our customers. Everywhere I went, I
was warmly welcomed. The economy was booming in Japan. OLs (“office
ladies”) who wore uniforms during the day changed into beautiful dresses
and walked around Tokyo’s streets in the evening. There was no crime in
Japanese cities. It was perfectly safe for a group of young girls to hang out
on the street until well past midnight.
My old colleagues who used to work in New York took me to places
like Shinjuku, Roppongi, and Ginza, where people milled around until the
early hours. Being used to New York, where everybody went home after
5:00 p.m., Tokyo seemed so much more exciting. Bright neon signs danced
in the dark sky, while down below shiny automobiles and crowds of
shoppers filled the streets. I was enveloped in a festive atmosphere and tried
to forget about my dark life in America, to which I had to return in two
days.
A month before, there was an inquiry from Japan’s Tax Bureau (the
U.S. equivalent of the IRS) about our Suspense Receipt Account. In normal
banking business, there were always some ‘stray’ funds with no identifiable
owner. Some banks were so sloppy in those days that they’d send $300,000
with no explanation and if you returned it, they would send it right back,
saying ‘need more detail.’ We had hundreds of these funds in our Suspense
Receipt Account. Though they had no owner, the bank couldn’t just take
them because someone might claim them later. The rule of the NY State
Banking Department was that after three years, they were to be sent to the
State as abandoned property. In our area alone, we had more than a million
dollars worth of these homeless funds.
The Tax Bureau in Japan noticed this and asked us to submit detailed
records. Apparently their suspicion was that we were parking some profits
in this account. I had a slight problem with this. When small change (less
than a million) resulted from settling my trades, I parked it in this account,
and if I needed a similar amount, I would use unclaimed items temporarily.
They were all squared away later, but entries on the books were made. In
other words, an item that originally had come in two years ago might have
been moved in and out several times.
From the long list of items, they picked out a particular one for about
$292,000 which we paid out to the proper owner. They asked for a copy of
the check we had used to pay it. I found the check, but the amount was for
$292,900. I must have used it and put it back incorrectly. Not to raise
unnecessary suspicion, I made a new cashier’s check for the correct amount
and sent them a copy.
But on my last day in Tokyo, I received a distressed call from Araki:
“They want to see the backside of the cancelled check.”
“What for?” I gasped.
“They must suspect we made up the check.” His voice turned even
fainter.
“Damn! Then, we’ll have to use the back of another check. They won’t
know the difference.” All the cancelled checks had an endorsement and a
stamp from the clearing bank. As long as they didn’t come to New York,
they would never see the original.
“I guess you’re right,” he said, concerned but relieved. The auditors of
the Tax Bureau were known to ask off-the-wall questions just to shake
people up. Without me, Araki would have confessed to making up the
check because he didn’t know why the amount paid was slightly different
from the original amount. I needed to get back to New York and do some
damage control.
When I returned to New York, driving back from Kennedy Airport, I
felt like driving off the Tri-borough Bridge and into the East River. What
was I going back to? This wasn’t a life. I was simply buying time until the
doomsday. But for what?
When I came to work the next day, Araki had some more shocking
news. The Tax Bureau wanted us to send the original check via overnight
mail. The original check! He was petrified. They had called our bluff. But
why? What had made them so suspicious? Something was amiss. My mind
searched for a possible way out. I regretted my decision to send the fake
check. If they started digging, they would eventually reach my secret.
I had to stop them in their tracks. To do this, I would have to sacrifice
something. To kill the shark, I had to offer it my arm. Knowing that it
would spark a fireworks of suspicion, I sent them the original check which
had a slightly different amount from the fake one. My strategy was to take
the heat for creating a fake check. Honesty was the best policy, as they say.
Well, relative honesty.
At this time, Araki and Yagi had been trading for nearly nine months.
Araki traded cash T-Bonds and Yagi T-Bond futures. They were basically
the same thing. In addition to a $50 million T-Bond trading authorization,
we were given a $50 million T-Bond futures trading authorization. A total
of a $100 million trading position was a respectable limit, considering the
$3 million I had started with four years before.
Araki was trading off the Cantor screen, so he didn’t have any contact
with the dealers I was using for my off-the-book trades. Yagi was using a
couple of Japanese dealers, but only in the futures market, so he had no
contact with my dealers either. They had been trading conservatively, and
were showing some profits. Or so I thought.
Three weeks after I returned from Japan, I felt the end of the road was
near. The Tax Bureau was sending two special auditors to New York to
investigate our Suspense Receipt Account. What was disturbing to me was
the fact that they did not ask any questions about the difference in the
amounts. In fact, they hadn’t mentioned anything about the fake check. Yet,
they were slated to stay in New York for two weeks.
Like the IRS auditors, they were notorious for having a nose for trouble,
and must have smelled something from Tokyo to send two auditors all the
way across the Pacific. I cleaned up the Suspense Receipt Account, but
what had been done couldn’t be undone. If they followed the paper trail,
they would find a $200 million hole. I had no idea how much chance I
stood against these bloodhounds.
The first day they arrived, I greeted them and before they could say a
word, I immediately apologized for the fake check, explaining that it was
done not to hide anything but to avoid unnecessary suspicion. I got down on
my knees as if I were begging for their mercy. I explained to them that we
are extremely short-handed and all of the clerks were so overworked that I
could not expect them to pay attention to every little detail.
“I know the quality of our work has been compromised because of the
sheer volume that we have to handle.” I was apologetic.
“Why don’t you hire more clerks, if your staff can’t handle the work?”
His demeanor was changing from that of suspicion to sympathy.
“I’ve asked them numerous times to give us a greater budget for this
office, but the midtown office has turned down our requests due to budget
constraints.”
“But we heard that this department generates more than 50% of the
branch’s profits.”
I told them how the management had neglected the downtown office
and the reason I created a fake check was to cover our less-than-desirable
level in the quality of work we performed. I felt I got them on my side. So I
continued, “Please, I beg of you not to mention our subterfuge in your
findings.”
To demonstrate our honesty, I showed them the original check and the
all the records. They weren’t impressed, but didn’t say any more about it. I
felt relieved when they seemed to let it go.
However, what came out of their mouths next paralyzed my senses: “By
noon tomorrow we’d like to have the General Ledger for the last six
months, showing all the entries with respect to your T-Bond trading.”
What was going on? I hadn’t the faintest idea. Where did they come up
with T-Bond trading? During our communication with them, nothing about
T-Bonds had ever been mentioned. I felt like a mouse cornered by two big
cats. Masuda, though, was very pleased that they weren’t upset about the
fake check.
It was customary for us to entertain auditors, especially when they were
in a foreign country. The Tax Bureau auditors had much less chance to
travel overseas than the MOF auditors, so we offered to take them to a
Broadway show.
However, there was one problem. They were not supposed to receive
any entertainment so as not to compromise professional integrity. To see to
it, they told us that this young representative who works in the Tax Bureau’s
NY office makes sure that they go back to the hotel every evening while
they were in New York.
 They were visibly disappointed, so we suggested they go back to the
hotel and we would pick them up later and sneak them out. It worked. They
had a great time at the Broadway show, but the next morning they paid us
for the play.
After they looked at the General Ledgers for a few hours, they started to
check the Suspense Receipt items again. They wanted to see other items
over $50,000. I gladly showed them anything they asked for. After a few
days, they went to the midtown office and looked at some documents
relating to T-Bond trading. We heard they were asking for any T-Bond
transactions between the NY Branch’s account and the account of the Head
Office. The mystery continued.
After they came back downtown, Yasui asked us to keep them there
because he didn’t want them snooping around Daiwa Trust in midtown.
When I heard this, it hit me like a bolt of lightning: These guys were not
here to look at the Suspense Receipt items. They were onto something
much larger involving T-Bond trading that might constitute tax evasion.
They had been auditing Daiwa’s corporate tax returns since the
beginning of the year, and must have smelled something with regard to the
bond trading of Daiwa Trust. So they used our Suspense Receipt items as an
excuse to come to New York to poke around. It was ironic that Yasui had no
idea there was something even bigger in the downtown office.
The two weeks of the special audit were almost over when I realized
this, but I breathed much easier because the auditors seemed to have thrown
in the towel. Once again, I somehow dodged another bullet.
1988 was almost over. Japan had recovered from a fifty percent drop in
the dollar (or a 100% rise in the value of yen), and stocks and real estate
continued to soar. Instead of discouraging Japanese exports, all the Plaza
Accord did was to make Japan twice as wealthy, in terms of the U.S. dollar.
The value of residential property in Tokyo climbed to 150 times that of
New York. Although the size of Japan was only one twenty-sixth of the
United States, its total market value was four times more.
The sharp increase in stocks and real estate masked the fundamentally
weak earnings strength of many companies. Manufacturing companies
especially, which had suffered reduced earning power due to the lower U.S.
dollar, were busy speculating in stocks. By this time, the operating profits
of major corporations were dwarfed by the unrealized gains in stock and
land. Daiwa had been making $200 million to $300 million per year from
its banking business, but its unrealized profits on its stock holdings was in
excess of $13 billion.
Feeling omnipotent, the banks relaxed their lending standards and made
hundreds of real estate loans that would haunt them for the next decade. But
no one was brave enough to say the King had no clothes on. In this
environment, any notion of prudence was replaced by aggressive expansion.
Defensive players were shunned, and offensive players rewarded.
In February of 1989, four examiners from the MOF’s International
Finance Bureau visited the midtown office to conduct a surprise
examination. Unlike a regular exam, which focuses on asset quality, they
were specifically focused on the trading operation. Three of them were
foreign exchange experts, and one was a securities trading expert.
Yagi and Araki both went to midtown to be available if one of them
asked to talk with a trader; the trading room in the midtown office had a
couple of seats reserved for an emergency appearance by T-bond traders.
No regulators were to know we had a trading operation downtown. That
was Daiwa’s dark secret.
The examiner in charge of securities trading called in Araki, because he
was in cash T-bonds. Nothing of substance was discussed. On the third day,
I went to the midtown office myself in case an examiner asked for the head
trader, but judging from the questions he asked Araki, which were more
methodological than operational, I doubted he would need me.
These days, the auditors and examiners were several years behind the
times. For example, just by looking, it would be obvious the volume of T-
bond trading exceeded the foreign exchange trading by a mile, but they had
sent in three foreign exchange experts versus one bond expert.
As far as I could see, the bond expert was not much of an expert. After
dealing with auditors and examiners day in and day out, I’d become an
expert myself on evaluating how knowledgeable they were. I sensed no
danger from them, but something I had never imagined possible occurred,
which threatened the whole situation.
In March of 1989, Yagi and Araki both suffered losses in excess of
$500,000. To have our $100 million trading authorization approved, a loss-
cut rule had been imposed. Because of the Daiwa Trust incident,
headquarters was nervous about granting us such a large authorization.
However, when we proposed a rule in which we would stop trading as soon
as the net loss reached $1 million, they agreed. This was an excellent
business proposition. What it meant was that with the maximum risk of $1
million, we could theoretically make $10 million to $20 million by day
trading. Only, it was not at all realistic.
The flaw was that the chance of losing $1 million on a $100 million
position was so large that it would be a miracle if we lasted a week.
With an average daily move of 1½ points ($1.5 million on a $100
million T-Bond position), if we were on the wrong side on any day, we
could be stopped out. Our operation would cease for the rest of the fiscal
year. It was like telling a boxer to go into the ring with Mike Tyson, but to
leave the second he came within three feet. Well, Araki and Yagi didn’t get
out fast enough and suffered losses that exceeded the $1 million limit.
Crestfallen, they came to me, and I had to allow them to continue
trading. I knew exactly what they were feeling because I had been at the
same crossroads five years earlier. They knew as well as I that it was a
violation not to report a transaction as it occurred. No one, not even Yasui,
could violate the bank’s rule with impunity, at least in theory. Unfortunately,
it was part of our corporate culture to take care of any problem on our own.
This was a show of responsibility as much as a reluctance to admit a
mistake. Admitting a mistake brands its maker as a failure. The nature of
the mistake matters, but the fact remains that an error in judgment was
made.
Japanese bankers were the second most elite group in Japan, following
government employees. They had to excel academically from a very young
age. The competition was fierce. In some cases, the race had been on since
kindergarten. If they stumbled, they were finished. There was no mercy. No
do-over. After sixteen years of academic competition, they reached the
goal: A position in a major bank, a cushy job that guaranteed a comfortable
upper-middle-class lifestyle until retirement, provided there were no screw-
ups.
Of those entering the bank in the same year, 80% would advance
together until a step before the position of branch manager. Then the senior
management made a more stringent evaluation to see who should move up.
Until this point, they didn’t need to do anything spectacular. In fact, it was
considered more desirable to be conservative than aggressive. The key was
not to screw up. They competed fiercely throughout their childhood to get
into the non-competitive echelons of government and banks.
 When a mistake was made, before admitting it, which would jeopardize
their whole life’s work, all would try to fix it as best they could. It is human
nature to conceal any potential discredit, but in this case, the penalty for
mistakes was enormous.
When I told these two traders I would cover for them, they were
extremely appreciative, as if I had just saved their lives. Had I ordered them
to report the loss, not only would they have been finished as traders, but
they would also be branded as failures. This wasn’t fair to them. I felt
responsible for putting them in this position, because I had hand-picked
them to be traders. And they were convinced they could make the money
back.
Unfortunately, they continued to lose, and their loss reached almost $3
million by April of 1989. By this time, they were in the same denial mode
that I had been in five years earlier. I regretted my decision to cover for
them, but it was too late. At first, I thought I could throw in a couple of
winning trades to cover their losses if they couldn’t recover fast enough on
their own, but my attempts were hamstrung. To cover their losses without
them becoming suspicious of my operation, I had to have trades that were
done within the day’s price range. It was harder than I thought. While I was
waiting for the right trades to come along, their losses escalated and became
too large for me to cover. I could have covered them technically, but not
conceptually. While they would be thrilled to know I had covered them and
set them free, they’d wonder how in the world I had managed it.
So now Yagi and Araki were also engaging in unauthorized trading. As
far as they were concerned, I was part of their impropriety. The three of us
began a clandestine operation to recoup ‘our’ loss, which had nothing to do
with my loss of over $250 million. The degree of deception reached a new
level. Juggling ten balls had been a feat I never thought possible, even
though I had done it, but now I had twenty. I shared their despair and fear of
being discovered, but this was only a fraction of my problems, and the
greater portion I could not share. They had me to reassure them. I had
nobody.
We decided to put on larger positions to recoup our loss. We felt
inflation was rising faster than the general expectation and interest rates
would rise in the near future. So we shorted bonds. To short means to sell
first, hoping for the price to decline, and buy back when the price is
cheaper. But to sell short, you must borrow the bonds from the dealer to
make the delivery to the buyer. To borrow the bonds, you had to put up
100% cash as collateral. In this case, the proceeds from the sale were used
as collateral. So, net-net, no money was needed.
No sooner had we started this than the market began moving higher;
once again it seemed like some kind of devilish plan was thwarting my
every move. In fact, on a daily chart, the T-bonds broke out of the existing
downtrend and looked to be heading higher. Our position was down more
than $15 million.
Yagi and Araki were as desperate as I had been five years before. After
experiencing the whole process and knowing the end result, I wasn’t
helping them to do the right thing. I faced a severe dilemma. If it would
have been myself, I’d have taken us out of the market right then, but I
couldn’t say to them, “Look, this is going to be a disaster, believe me, I’ve
been through it already so I know.” Or, “If you realize a $15 million loss
now, it will seem nearly impossible to recoup it, but it’s much easier than
being $50 million in the hole.”
They were in denial. The higher the market went, the more chance it
would come back down, they thought. Once the loss jumped from $3
million to $15 million, even if it went to $40 million, the difference was
negligible in that it was too big either way to report.
So instead of getting out of the market, we added to the existing
position on the assumption that what goes up must come down.
We were breaking all the rules of trading, such as ‘Never add to a losing
position,’ ‘Cut the loser and let the winner run,’ ‘Don’t marry your
position,’ ‘Never say never,’ ‘Listen to the market,’ and ‘Have a
predetermined exit point.’ In fact, we had no exit strategy. We thought it
could go up another few points, but not much more. It would never happen.
Not only wouldn’t we cut any loss, we were going to stay with this position
‘til death do us part. The market was clearly saying it was going higher,
according to the chart, but we didn’t want to hear that.
The higher it went, the more reason we had to stay in, and the more
difficult it was to get out. At every spike in price, we thought it was the
peak. We continued to add to the position.
It was insane, even for me. But the pain was diluted by having comrades
to lick each other’s wounds at the end of the day. We took comfort in
repeating platitudes we each knew rang hollow. We were going down
together, warding off any awareness of our imminent doom with bold and
daring optimism: Tomorrow, we hoped, it would all change.
 Chapter 12

The Big Bet

In April of 1989, Yasui asked me to go to Japan with him again. This time
he wanted me to represent his North American strategy before the senior
executives. Specifically, to make a more in-depth presentation on bond
investments. Four speakers would represent the major markets: Southeast
Asia, China, Europe, and North America. I would speak for North America.
It was all wrong. Setting aside the fact that I was hiding a $300 million
trading loss, I simply didn’t belong there. Other speakers were the heads of
respective regions presenting their macroeconomic strategies. I was nothing
but a locally hired securities custody officer/trader. Ordinarily, such an
exception is frowned upon by other executives, however, it was tolerated
due to Yasui’s charisma and unconventional management style which Mr.
Abekawa, the CEO, valued highly.
It was bad enough that I had to engage in pretension again, but this time
I had to leave two junior traders with an $800 million unauthorized
position. Normally, I’d always ‘clean up’ any unfinished business before I
took more than two days off, but this time the position was no longer just
mine. It had become ‘our’ position, so I left it to them to watch over it.
Once again, I visited my parents before going to Osaka. Like any
parents would feel, they were very impressed that their son had been
summoned to high-level meetings at the headquarters in Japan for the
second time in six months. My father had retired from his exporting
business eight years before, and at 75, his health was deteriorating faster
than his age. Nevertheless, when he talked about me, his weary face
brightened with joy. Having a son who was the MVP of a major bank’s
overseas operation was definitely something to brag about in my
hometown. I dreaded the day he found out the true story. It would crush
him, without a doubt. As horrible as it was, I began wising that he would
either pass on soon or become senile so that he wouldn’t even know what
happened. What was becoming of my life? I was only keeping myself alive
for the sake of my sons—while wishing my own father dead.
 As I expected, the air was tense at the meeting. Many directors in the
room were unimpressed with Yasui, and some bluntly ignored me and
snoozed. After a twenty-minute presentation, I left and went to downtown
Osaka by train.
Osaka, a city of merchants, is the second largest in Japan. Everywhere I
looked, construction was going on. The country was enjoying phenomenal
growth with zero inflation. With a domestic shortage of stocks and land,
large cash-rich corporations were investing heavily in foreign countries.
Factories were being built in Scotland, Wales, and Northern England. Auto
manufacturers were building plants in America’s Midwest, while landmarks
such as Rockefeller Center, Pebble Beach Country Club, and Columbia
Pictures were being bought. But I didn’t see any difference in the working
people.
I called my traders in New York every day while I was there. Things
weren’t going well. They sounded depressed. I realized I had been running
my covert operation for three years before I had a billion-dollar position,
but they had only been doing this since January. Although they were not
alone, as I had been, the pressure on them was tremendous. They simply
hadn’t had enough time to adjust to their predicament.
They were relieved when I came back to New York, but their
expressions were subdued as they told me the damage. During a week, their
loss had increased from $15 million to $20 million. That evening, we went
to a Japanese restaurant down the street and formulated a plan. It was not
prudent, nor was it intelligent. They both wanted to continue adding to the
position as the market moved higher. Looking at their serious expressions, I
wished I could just tell them, “You can forget about the loss. I’ll take care
of it.”
I continued to carry both my own off-the-book positions and on-the-
book-positions while trading for the bank. By this time, it was a well known
fact that Daiwa Bank was by far the most active T-bond trader on Wall
Street.
All the proprietary trades were done at Cantor Fitzgerald, which was
located on the 105th floor of the World Trade Center. The firm was
privately owned, and the way it was generating income was the envy of
Wall Street. Because Cantor was a broker, it didn’t take any market risk. All
it did was provide a level field for all the participants in the bond business.
 Dealers like Salomon Brothers and Goldman Sachs also tried to buy
from one customer and sell to another, pocketing the difference, hopefully
in a few minutes. But the reality wasn’t that simple. A trader at Salomon
Brothers had to make a market on a whim. Let’s simulate a trade. Suppose I
want to sell 50 bonds, or $50 million worth of U.S. Treasury bonds.
First, I call up Steve, the salesman at Salomon Brothers: “Hey Steve,
bid 50 long bonds for regular settlement.”
“Okay, just a second.” The salesman yells into the box connected to the
trader, “Joe, bid 50 bonds regular!”
“Ah...50, did you say….?” The trader looks at bid prices on all the
broker screens to find the best one. He sees a dealer trying to buy 100 bonds
at 97 12/32, and he thinks if he can get it at 11, he can blow them out at 12
and make a tick. That’s a $15,625 profit, less the broker commission. That’s
good business.
“I’ll pay 11!” Steve clicks the customer line and reports, “11, 97–11”
I have only one access to the market, which is the Cantor screen. It
shows a market as: (97.12–13 2x3). This means the buyer is willing to buy
2 bonds at 97.12, and the seller is willing to sell 3 bonds at 97.13. The
buyer may want to buy more; he is just not showing this on the screen. To
avoid scaring the seller, a buyer looking to buy a lot often doesn’t show his
‘size’.
Now I am thinking that I can hit the bid on the Cantor screen and try to
sell 50 bonds at 12. The chance is that I may get only 10 bonds off, and the
next best bid could be 11 or worse, if the market moves down. I could take
Solly’s 2 11 bid and be done with all 50, or try to work it off on the Cantor
screen. I decide to squeeze his trader for a plus (0.5 tick more).
“Tell him I want 11.5.”
Steve calls the trader, who is anxiously awaiting the reply: “Joe, he
wants 11.5.” Now, Joe is in the driver’s seat, because once I told him I
would sell it for 11.5, he’s got my commitment locked. He will try to wait
as long as he can to see if the market comes up. If it does, he’ll buy it and
sell it at 12.5 or even 13. If the market goes down, he can say, “I’m not
interested!” Luckily, he sees a 12.5 bid on one screen.
“Okay, I’ll pay 11.5,” the trader screams.
“You are done at 97–11.5,” Steve tells me. I am done, meaning I’ve sold
my 50 bonds to Salomon Brothers at 97 11.5/32, or 23/64. Now, Joe needs
to get rid of 50 bonds at better than 11+ 3 . Whether he makes money
depends on various factors, but that’s not my concern. Sitting in the middle
of the trading floor, he has many resources to get rid of these bonds at a
profit. So the dealer takes a risk by making a market.
Now let’s look at what happens at a broker like Cantor Fitzgerald. I see
the Telerate screen on which Cantor shows their bond market quotes. I see
the long bond quoted at (97.12–13 2x3). I call my broker, Bob, at Cantor,
“Who is on the bid side?”
They can’t disclose the identity of the player. He’ll only tell me whether
it’s a street (a dealer like Salomon) or a retail, like Daiwa.
“It’s a street .”
“A big street?” If it’s a large dealer, he’ll buy more than 2 bonds.
“Yeah….”
“Offer 5 at 12.5” I want to see how eager he is to buy.
“Five at 12.5, bonds!” Sam screams out, hitting his keyboard. The quote
on the screen changes to: (97.12–12.5 2x5). The offer is mine. Now that
I’ve got my line in the water with live bait, I just wait.
I see the screen change to (TAK 97.12.5x5), and the phone rings.
“You sold 5 at 12.5. Do you want to sell more?” Bob screams in my ear.
“Yeah, sell a total of 50!”
As soon as I tell him, Bob stands up in the bond room and tells the
broker, who is working for the buyer, “I’ll sell you 45 more!” The broker
relays the message to the buyer, who indicates he’ll buy 15.
“My guy buys 15 more and done!” Bob tells me.
Then Bob looks around the room to see if there are any other buyers. He
sees two more brokers with their hands up. Bob says, “I’ll sell you 5 and
you can buy 25 more!” The broker asks his customer; they are connected
with a direct phone line.
“I buy 30 and I buy 20 more!” the broker shouts back to Bob.
“You can sell 20 more, if you like,” Bob tells me, but I tell him I am
done. While all of this takes about a minute, on the screen the number
continues to flash until it gets to: (TAK 97.12+ x50). Once the trade is over,
the quote goes back to: (97.12+–13 10x3).
Obviously, Cantor takes no risk. They simply act as a middleman, but in
every bond traded, they made $78. During this period, we constantly traded
more than 1,000 bonds, and on some days, as many as 2,000. The
commission on 2,000 comes out to $156,000, with no risk whatsoever. Most
of their brokers were only high school graduates, because to broker a trade,
all they needed was a loud voice and aggressive posture. Unlike dealers (or
investment bankers), they didn’t need a research department or analysts—
no research and no risk. The biggest expense they had was entertaining their
customers. Taking clients to Atlantic City by helicopter was not unusual. Of
course, they could easily spend $3,000 for dinner when ordering $500
bottles of wine. Brokers were required to entertain clients because it was the
only way to maintain their loyalty. For an account that paid them $100,000
a day in commissions, they were willing to do just about anything. Yagi,
Araki, and I were showered with dinners and tickets to Broadway shows.
When Yasui moved the back-office operations to midtown so that they
could confirm all the trades that I was doing, I had to make a slight
adjustment. Up until this point, I used to record some trades on the books of
the bank to show a small profit but other trades to recoup my losses were
off the book.
Since I was receiving all the trade confirmations, I would pick out the
confirmations for the on-the-book trades for the bank’s records. All other
confirmations were kept in a box in my office. Now that our back-office
would be directly dealing with the back-office of the brokers/dealers, I
needed to make changes. I grouped certain brokers that were used only for
on-the-book (authorized) trades and others used only for off-the-book
(unauthorized) trades. So, our back-office would contact those brokers that I
use to do on-the-book trades, but not the brokers I use for unauthorized
trades. I put Cantor in the group of on-the-book trades, though soon there
would be a caveat.
In those days, we were the largest customer of Cantor and my broker,
Bob was naturally the top broker. As much as they loved our business, we
had a serious problem. Now that all the trade confirmations were being sent
directly to our back-office in midtown branch, we could not continue to
trade the way we had been trading.
Since my intraday position limit was 50 bonds ($50,000,000), trading
over 1,000 bonds a day would naturally raise a red flag. When I told Bob
about my problem, he came over to our office with his boss, Howard
Lutnik, who then was the head of the bond operation but in a few years
would become the CEO of Cantor. As they wanted our business so badly,
we discussed a way to conceal the true volume of our trades. I suggested
that they ’wash out’ trades before they are input on their system. The
method of ’washing out’ was that if I had a buy ticket of 20 bonds at 10 and
20 bonds at 30, and a sell ticket of 40 bonds at 20, we would ’wash’ them
out as if those trades didn’t even exist. By this method, when we actually
traded 2,000 bonds, after washing them out Cantor would send trade
confirmations totaling 150 bonds.
So at the end of the day, when we checked out all the trades we did with
Bob, I would tell him which trades were to be washed out. He would then
delete those trades and send what was left to his back-office for processing.
This was clearly unethical if not outright illegal on the part of Cantor
because they were creating fictitious confirmations to defraud the bank. In
fact, their deception didn’t stop at the bank as the bank reported trading
figures to the Fed regularly. No other dealers would have done things like
this because they all had a compliance department that would not allow
such a subterfuge. Apparently, because of the business he was generating,
no one was questioning Lutnik.
By June, the bonds had gone up from 97 in March to 108. After adding
to the losing position at perceived ‘peaks,’ our position had swelled to $2
billion while ‘our’ loss had increased to more than $120 million.
Almost weekly, I had to sell customers’ T-Notes to raise fresh cash to
pay for the loss. At this time, Masuda and I were in individual rooms with a
glass wall on the top half at the side of the rectangular office. Along the
narrow end with the window on Chase Manhattan Plaza, Araki, Yagi, and
two trading assistants sat side by side facing the office. In front of them
were ‘islands’ of sections that handled various aspects of the securities
custody department: ‘DTC,’ which handled stock settlements with five
clerks; ‘BTC’, which handled T-bonds and T-notes settlements with four
clerks; ‘Dividends and Reorganization,’ which handled dividends, interests,
and reorganization with three clerks; and ‘Remittance,’ which handled fund
transfers with two clerks. Facing these sections from the long side of the
office was another young Japanese officer who was in charge of customer
service and assisted Masuda.
To settle my off-the-book trades, I had to ask the supervisor of the BTC
and remittance sections to process my hand-written instructions. He had no
reason to suspect anything improper, because I had created this department
from scratch and did all the hiring and firing. Each time we hired a person, I
did the interviewing. It was only during the last two years that I had another
Japanese officer helping me.
 In 1989, the custody department was generating $10 million in fees and
interest and the T-bond trading operation $3 million in profits. Carrying a
$2 billion position meant that Wall Street dealers were collectively lending
us $2 billion.
There were constantly eight to ten dealers who would give us a $200
million repo facility. But just like credit card lines, when they realized we
had similar repo facilities opened with other dealers, they had to get
nervous.
Many realized we were carrying an abnormally large repo line. To make
matters worse, we were short the bonds. If I were long (buy first in order to
sell later), they could assume we were funding our large bond portfolio
through the repo market, which is a perfectly prudent thing to do. Interest
rates on T-Bonds being higher than the short-term repo rate, the position is
said to produce a positive carry, meaning you earn the interest differential.
Although a $2 billion position in long bonds poses a mind-boggling market
risk on daily price fluctuation, in those days, the general perception was that
Japanese banks could handle any risk. With $13 billion unrealized profits
on stockholdings, you might say Daiwa had a very deep pocket.
However, being short is a different story. When you short the bonds,
you are taking the opposite position of someone who is long. So while he
has a positive carry, you have a negative carry. In other words, it costs you
the interest differential to carry a short position. This is the reason anyone
with a short position is speculating on the price to drop in a relatively short
period of time.
Any sensible dealer could call friends on the Street and figure out we
were purely speculating on the bonds, with an enormous risk that wasn’t in
line with our branch’s business.
Yet no one questioned anything, because, at this point, anything was
possible with Japanese banks. At least such was the general perception in
America. In 1982, the world’s ten largest banks, by assets, were led by
Bank of America, Credit Lyonnais, and Citicorp. Japan’s Daiichi-Kangyo
and Fuji were ranked 8th and 10th, respectively. A mere five years later in
1987, nine Japanese banks ranked in the top ten. The largest U.S. bank,
Citicorp, came in at 22nd. Daiwa even beat Citicorp.
In the early 1980s, Congress demanded a stricter capital ratio for U.S.
banks, following the multi-billion-dollar rescue efforts of Mexico and
Continental Illinois. This didn’t sit well with the U.S. banks, which were
already facing stiff competition from Japanese banks.
Across the Atlantic, the British banks were in the same boat. So, in a
nutshell, the U.S. and British regulators drafted an international standard for
the bank capital ratio requirement of 8%. This meant that a bank which did
business internationally had to have capital (stockholders equity plus
reserves) equivalent to eight percent of their total assets.
In 1987, Japanese banks had, on average, a 3% capital ratio. In other
words, they were lending 33 times their capital base. If they were to accept
the U.S. proposal, they had to either reduce their assets by more than 50%,
or increase their capital 2.7-fold.
Neither was feasible. There was only one solution for Japan. The MOF
demanded at least part of the unrealized profits in stock be counted as
capital. The top twenty banks had approximately $70 billion in capital, but
the unrealized profits on their stock holdings exceeded $350 billion. When
the Japanese banks claimed that in the event of loan losses they could sell
stocks to raise extra reserves without touching their capital base, U.S. and
British regulators reluctantly agreed to count 45% of the unrealized profits
as part of their capital.
In hindsight, this was the day when the Japanese banking industry
signed a pact with the devil. Although some were concerned that if the
Japanese stock market declined, the banks’ capital base would shrink, the
MOF insisted the Japanese stock market would not go down for a
prolonged period of time because there was an inherent shortage of stocks.
As the stock prices continued to soar, their capital base soared as well.
Each $1 gain in unrealized profits brought them $5.4 in lending capacity.
The more they lent, the higher stocks rose. The velocity of the rise was self-
perpetuating. The whole country turned into a gigantic casino. Just like the
Plaza Accord, the West’s intention to ‘contain’ Japan backfired.
Many books were written to warn how Japan would be the primary
superpower in the 21st century, replacing America, and Japanese banks
would own the majority of retail banking assets in this country. I didn’t
believe any of this since I knew the true nature of the Japanese miracle, but,
illusion or not, the fear and admiration afforded to Japanese banks in those
days certainly facilitated our operation.
On July 11, 1989, my broker at Cantor warned me that a client was
suggesting Cantor ‘check out’ Daiwa’s unusually high activities. This was
bound to happen. But the inquirer was not one of the dealers we used.
Shortly after I heard this, I was told that our internal auditors were to start
their annual audit on August 1. I was hoping they’d wait until September,
but it was already scheduled.
With this news, we felt pressure to end our game soon. The bonds had
gone up to 109, and there seemed to be no sign of any selling pressure. We
decided to try to pound the market down to the 106 level by selling another
$1 billion so we could buy them back.
As we started selling, the market began pulling back grudgingly,
partially on its own weight and partially due to our sales. By the time we
sold $500 million, the bonds were trading down to around 108, but a
strange phenomenon occurred. As we sold another $500 million, the market
began moving back up. It seemed that the more we sold, the more it went
up. It defied the law of supply and demand—unless somebody was
determined to break us, somebody who knew we were in trouble and was
taking everything we sold right into his hands. Because our repo lines were
maxed out, we had to stop there. Our position swelled to $3 billion.
Despite our sale, the market continued to climb during the next week.
We were paralyzed with the gravity of what we were doing and the degree
of risk. Our loss would have been about $180 million if we had bought
them all back at around 108. But we couldn’t keep the market down with a
$1 billion sale. We were naïve to think the dealers would keep our business
activities secret.
Completely defeated, Yagi came into my room, sat on the chair across
from my desk, and looking at me with sorrow in his eyes, said, “I think they
all know what we are doing.”
“I think so, too,” I replied. “Who are we kidding? Eighteen dealers
carrying a couple of hundred-million-dollar positions each for us. They can
add the numbers and come up with a clear-enough picture.” The dealers
didn’t even have to mention who, because we were obviously the most
active cash bond trader on Wall Street.
“There is no one else out there who trades like we do,” Yagi said. “All
they have to refer to is ‘them,’ and everybody knows they are talking about
us.” He was staring at the green numbers on the screen, which showed
(111.12 – 10x___). This meant the buyer would pay 111.12 for 10 bonds,
but there was no seller. Although it was after 5:00 p.m., it was unusual. Ten
seconds later, the quote changed to (111.16 – 10x___). It had to be a dealer
who had to sell 10 bonds to a customer and couldn’t find any to replace his
short position. He was fishing for a seller.
“How is it possible there is no seller, after we sold 1,000 bonds only a
week ago? Whoever bought them at 108 had to want to book some profits.
At 111.16, they’ve already made $35 million. It doesn’t make any sense,” I
said.
Araki walked by my office and looked in. I signaled him to enter. “As
you know, the auditors will be here tomorrow,” I told him. “I think we
should close all the positions, for now. It’s just too risky.”
I looked at Araki, who was staring at the screen intently. The quote
moved up to (111.18–111.20 3x1).
“Damn! How can the price rise?” Araki cursed.
“When we come in tomorrow morning, let’s buy them all back. We
better get the hell out of these positions.” I said it almost hopelessly.
“I agree. We’re like a sitting duck,” Yagi replied. “As long as we hold
on, they’ll keep buying because they know one of these days, we’ll have to
buy back 3,000 bonds.
On August 1, when we got to the office, the Cantor screen was showing
the bonds: (111.18–19 2x8). The T-Bond market didn’t start to trade in
earnest until 8:20 a.m. when the futures market opened in Chicago. At 8:25,
the bonds traded down to (111.16–17 3x9).
I signaled them ‘let’s go’ from my office.
“Hey, John, offer 100 bonds. Quick.”
“A hundred?”
“Yeah, hurry.”
“Just a sec.”
“At 20.”
“At 20? It’s offered at 17 on the screen!” Apparently he didn’t want a
trade. It was not an aggressive offer. When the trader doesn’t want to go
long for whatever reason, he shows offers above the market. “You want me
to try 19?”
While he was asking me, the quote moved to (111.17–18).
“No, we’re done.” I hung up; already my finger was on another button:
“Marty, offer me 100 bonds, quick.”
“At 20.”
“Done.” It was a good price because the other guy must be bidding 19
for 100 bonds on another broker screen. I had to move on.
 As I was about to press the next button, the money transfer clerk came
in saying, “Excuse me, Mr. Iguchi, Nancy (the auditor) wants to see all the
outgoing transfers from last month. Can I give them to her?” Two auditors
had come to our office as scheduled. They were supposed to ’learn’ how the
operation in the custody department was structured but I had no doubt that
Yasui instructed them to check specific areas.
By this time it was like playing a game of chess with Yasui. To win, I
had to always read several moves ahead of him. The chief auditor, John
Cassis, was a Frenchman in his 40s. His assistant, Nancy Cho, was Chinese.
Cassis was not very thorough but Nancy seemed to be very perspicacious.
They told us that they would try not to interfere with our daily work but
because of the time limitations, they asked us to cooperate with them. To
facilitate their work, I suggested that they ask me if they needed to see past
work.
She knew I was busy, but felt I should be alerted. My brain was
digesting what it would mean for the auditor to see all those millions of
dollars of unauthorized payments. She would be bound to ask what they
were.
“No!” I shouted. “Ah, can you possibly separate my payments and not
let her see them? They are not part of the custody department.” I saw 100
bonds trading up at 111–24 on the screen, but the problem at hand required
my immediate attention.
“I think so. Let me try,” she replied.
“Yeah, try. I don’t want her getting into my stuff.”
“Okay.”
As she began to leave, I said, “Thanks for bringing it up to me; it’s
important that I know what they are doing. Tell me if they ask you anything
about my payments.” In an ordinary situation, such a blatant request to
conceal facts from the auditors would raise suspicion. But coming from the
head of the department who had been around more than thirteen years, she
felt her loyalty was to me rather than to people in the midtown office.
My heart fluttering with anxieties in two different situations, I picked up
the phone again. “Hey Bob, I need to buy 50 bonds for tomorrow’s
settlement.”
“Hold on … at 27.”
The screen was showing (111.24–111.25 2x1). The dealers were now
hedging themselves because of the way the market had jumped in the last
ten minutes with lots of cash bonds trading on the screen.
“That’s done.” I was disgusted. I had bought only 250 bonds, and the
market was up 10/32nds (10 ticks). I walked over to Yagi’s and Araki’s
desk. They were in the middle of a trade. Araki had two phones in his hands
and was trying to get two dealers to offer him bonds. He penciled on his pad
that he had bought 150 so far and was now working on another 100. Yagi
had done 200 and was working on 50 more. That was a total of 750. I was
getting scared. If only 750 bonds could push the market up almost a half
point, who knew how far it would rise by the time we were done. When
they got off the phone, I sat down beside them and told them to hold off
buying the rest, “I think they know we are covering our shorts. Let’s stop
here and feign them.” They agreed, and we waited about an hour. The
bonds traded down from 111.30 to 111.24 but held there.
In the meantime, I kept my eye on the auditor, who was sitting by the
money transfer clerk asking questions. Pointing at something on a computer
printout, she was shaking her head. My heart pounded faster. What could
she be thinking about? I waited until the auditor went back to her desk to
call the clerk on the phone.
“What was she shaking her head about?” My heart was fluttering with
anxiety.
“She couldn’t figure out why the serial numbers were not consecutive.”
All the money transfer items were printed in the order of the clerk’s
release of instructions to the Fed. She had taken my money transfers out
and provided only the ones belonging to our customers, so the numbers
could not have been consecutive.
“What did you tell her?”
“I said it’s because the bank combines the Midtown’s money transfer
items.”
It made no sense, but I appreciated her attempt anyway. “Was she
satisfied with that explanation?”
“I think so.” She said it unconvincingly. I looked at the auditor. She had
her face buried in some papers. I came back to my office, watched the
market settle in around 111.24, picked up the phone, and told Yagi to begin
buying again. “Let’s buy at least 500 each. Don’t worry about a couple of
ticks. Take whatever they give you and move on.”
“Hey, Marsha, offer me 100 bonds regular.”
“Sure………at 28.” Damn! They were scared.
 “Done. I’ve gotta go.”
“Hi, Sal, offer me 100 bonds right now.”
“100? Okay, just a sec…at 30.”
By the time I pushed another button, the quote on the screen went to
(111.30–112.00 100x5). These dealers were not taking any time covering
their shorts. Large shops like Shearson Lehman, Merrill Lynch, Goldman
Sachs, and Morgan Stanley should have had enough customer flow and
other arbitrage situations to be able to buy 100 bonds without showing a
bullet bid on a broker screen, but they were not taking a chance. They were
afraid to hold any shorts for more than a minute.
“Josh, I need you to offer me 100 bonds.”
“Hey, I hear you guys are buying a lot of bonds this morning.”
“Where did…ah, never mind, get me the price.”
“At 03, he says there is a huge cash buyer.” I sensed the word was now
spreading that we were buying.
“Done. I’ll call you later.”
“Mike, offer me 100 bonds.”
“At 06, 112.06.”
“06? Are you kidding? What the hell is he smoking?”
“Now it’s 07.”
“What! Dammit, do it. At 07.” I was furious. I went over to see what
Yagi and Araki were up to. They looked exhausted. Araki was taking 50
bonds at 112.10. He was so frustrated that he smashed his phone in the
cradle. We tallied up the total bonds we had bought: 1,800.
“Let’s stop here for today. I don’t want them to think we’re panicking.
There has to be some normal profit-taking. If they want to keep the pressure
on us, they’ll have to take on all these profit takers.”
They agreed. That evening, we met again at the Japanese restaurant.
The waitress must have thought we were mourning the death of a close
friend. Yagi and Araki each had two kids who were younger than mine. As I
looked at them, beaten and worried, I decided to protect them all the way.
There was no reason to get their families involved in this. Luckily, I didn’t
have a wife any longer who was dependent on me, as they did. My kids
were with their mother, who had recently remarried a wealthy guy.
“Regardless of the price, let’s cover the rest tomorrow, because I can’t
be sending out millions of dollars when the auditor is looking right at those
computer printouts,” I said. To keep them from having a breakdown, I
didn’t tell them anything about the auditor checking the money transfers. In
the next several days, I had to sell at least $100 million worth of customers’
T-Notes to pay for the losses. Doing this with professional auditors walking
around with magnifying glasses like Sherlock Holmes was no picnic.
On August 3, we came in early enough to reconfirm our strategy. We
didn’t want to spook the market, but didn’t want to miss the chance. The
bottom line was that we needed to buy $1.2 billion worth of T-Bonds during
the day. As soon as the futures market opened, we began buying. The bonds
started slightly softer at 112.02, but quickly jumped to 112.16.
“Mark, do you think your trader has some cheap bonds?” This is a futile
question because, even if he does, he isn’t going to let you steal them.
“Let me ask, how many do you need?”
“A hundred.”
“Hold on…at 112.20.”
“That’s not cheap at all, dammit! But do it.” I hated to trade like this but
I had no choice.
“Linda, offer me 100 bonds. Quickly, before they go up.”
“OK…” She was taking forever. “At 24”
“Jesus, Linda. You waited so long it cost me three ticks!”
“You don’t have to do it.” Which was true, but not true: I had to.
“All right. Done!” I was getting raped. This market was on fire! Still, I
needed to buy 200 more. I jumped on another line. I would pay anything at
this point just to get out.
“Hey Sal, offer me 100 bonds!” The moment I said this, the quote on
the screen went down to 112.20–21. I had no idea what this meant.
“At 20.”
“At 20?”
“Yeah, at 20.”
“Done at 20, one hundred times.”
In this instant, I knew we’d been had. When a dealer is willing to sell
you 100 bonds on the bid side, the market’s in trouble. The quote on the
screen dropped to 112.16–18. Nevertheless, I bought my last 100—at
112.14. Yagi and Araki both came into my office. “All done?” They both
nodded. We sat there silently for the next thirty minutes with our eyes glued
to the screen. The bonds were dropping like a rock. There were no buyers
left. 112.00–02, 112.00 hit, 111.30, 111.30 hit, 111.27–28, 111.27 hit,
111.22, 111.22 hit. Any bid that showed up on the screen got hit (sold)
immediately. There were only 1 to 5 million. They traded all the way down
to 110.16, and the next day down to 108. The market had shot up 4 points
just to blow us out and came back down to where it was only four days
before. After buying $3 billion worth of bonds in two days, how was it
possible the bonds were 2 full points lower?
That afternoon, I calculated the numbers: The amount of money that
had to be paid to each dealer for the net differences, the number of issues,
and the amount of customers’ T-Notes I had to sell to raise cash.
It was mind-boggling. To make matters worse, I had to do them all by
myself, manually and secretively. Worse yet, to protect my secret, I had to
keep Yagi and Araki away from these settlement procedures. It would take
me until the wee hours. I couldn’t begin until the clerks and auditors went
home.
Nancy had joined the bank about six months after Cassis as his junior
auditor. I didn’t fear Cassis as much as Nancy because, despite his CPA
status, he was not very thorough. In fact, I rarely saw him work
continuously for more than twenty minutes. He seemed to be more
interested in talking to the clerks, young women in their 20s. He also came
into my office to shoot the breeze because he was frustrated that there were
no other American men at the bank. All the male officers were Japanese,
and the few male clerks in the Midtown office were in their 20s. So he
found me to be someone he could talk to. Being in the position I was in, it
didn’t hurt to be friendly, so I entertained him every time he came by.
When I was putting all the trades together at my desk, I sensed the
presence of a large figure standing in front of me. It was Cassis; I didn’t
know how long he had been standing there watching me work, but I smiled
and said, “Sit down. What’s up?”
“I don’t want to bother you in the middle of work, but could we go to
dinner tonight? There’s something I want to ask you.”
“What about?” I asked Cassis, attempting to give the impression that I
had nothing to hide.
“Well, it’s hard to talk about here. Are you busy tonight?”
“Ah, no, we could go get a bite to eat after 6:00.” I would have to return
to the office later and work all night.
“Good. Oh, by the way, I got word that the New York State Banking
examiners are coming in the last week of August.” He was giving me the
inside scoop.
 “So you have to go back to midtown?” This might be a blessing in
disguise.
“I may have to go up there for the first several days, but we’ll finish our
work here.”
Damn!
That evening we went to the Village and dined at one of those cafés
with tables on the sidewalk. I was apprehensive about what he might say,
but pretended I’d forgotten he’d mentioned having something on his mind.
During dinner, we shared our experiences as foreigners and he revealed that
his wife had left him and all his assets were frozen. In many words, what he
told me was that he was heartbroken, devastated, broke, and miserable. I
listened to his sad story for two hours. Feeling comfortable with me, he
finally popped his question: “Can you lend me some money?”
I was shocked. Here he was, the head of the internal audit group,
conducting an audit of my department. He hadn’t had the faintest clue how
terrified I had been all day of his presence.
“I asked Mr. Yauchi for a $1,000 loan from the bank, but he turned me
down.” A $1,000 loan? This guy was the highest-ranking American officer,
for crying out loud! Well, if Yauchi didn’t want to feed his own soldier, I
would. And then he would find out where this soldier’s loyalty lies. Not that
I meant to use it to make him look the other way, but if push came to shove,
I would ask him nicely, and I was sure he would consider it. I promised to
lend him the money.
I came back to the office at 10:30 p.m. and worked until morning.
During the next two days, I settled all the trades, nearly 50 trades totaling
$3 billion, paid all the losses (amounting to roughly $350 million), and
cleaned up the traces so the auditors would not see anything. All the while,
I had to keep my eye on them to make sure they were not poking into the
wrong areas, although there wasn’t much I could do if Nancy found
something critical. She was sharp. I had some very close calls in the past,
but this one was by far the toughest. Considering the mental pressure I was
under, it was a miracle that I didn’t have a nervous breakdown. Though I’d
never thought myself as being mentally strong, this incident made me
realize that I could not only function, but function well, under enormous
pressure.
The next day, one of the dealers called to tell me there was a rumor on
the Street that I had been fired after taking a bath in the market.
 “Are you kidding? Tell them I’m alive and well. Yeah, we suffered
some losses, but not significant enough to shake us.” I thought I put the
issue to rest with this, but I was wrong. There were a number of sources.
Our new manager, Hiroshi Ikeda (Yasui had gone back to Japan in
April) received a call from our Headquarters. They had heard a rumor in
Japan that Daiwa NY had lost a hundred million dollars. He brushed it off
as a bad joke. It scared me that people outside the bank had a better idea
what was really going on. Whoever figured out the $100 million loss must
have been the one who had preyed on us. He must have deduced that our
operation was illicit and that we’d succumb to the pressure and had thrown
in the towel. Instead of blowing the whistle, he had capitalized on his
insight. A shiver ran down my spine, realizing I was at the mercy of an
invisible adversary.
 1989 Securities Custody Department
My loss was at $600 million (1st row, 3rd from left).
 Chapter 13

More Close Calls

I took two weeks off from work starting on August 21. Since 1986, our
divorce agreement required me to take the kids during the month of August.
This year I sent my older son, Ben, to Japan to learn the language. He
stayed with my parents and attended the 7th grade during July.
With little knowledge of Japanese, he had a difficult time at school. My
younger son, Ryan, had been with me since the beginning of August, at a
house I shared with a friend. Unfortunately, I could not come home from
work before 10:00 p.m., and it was boring for a nine-year-old to just sit
there all day. On the weekends, we spent every hour fishing, watching
movies, playing golf, and so on. Ryan was a lot like me, very private and
considerate of others. He never complained about being left alone.
On August 21, I spoke to Masuda after his first-day meeting with the
examiners from the NY State Banking Department. This was when they
would outline their schedule and request certain documents. State banking
examiners had been primarily concerned with the bank’s asset quality and
nothing else, so I wasn’t too worried. But what Masuda casually told me
destroyed my level of comfort: “Oh, they said an examiner from the The
Federal Reserve Bank would be sitting in.”
“What? For what?”
“I don’t know for certain, but he is going to join the examiner for
trading operations.” Masuda had no idea we were trading beyond our $50
million limit, let alone carrying a $3 billion repo position. The NY the Fed
conducted an Open Market Operation on a daily basis. Through this, the
central bank controlled the amount of money in circulation. Their method
was the repurchase agreement, or repo. When they needed to drain money
from the system, they borrowed cash from the dealers against Treasury
securities, and when they needed to add money to the system, they lent cash
against them. The average repo was $2 billion – $3 billion. Because the Fed
was in the repo market every day, I assumed they kept a tight relationship
with the repo desk of the government securities dealers. We were carrying
$3 billion in repo transactions, and I could hear the examiner’s question:
“We have a report of your bank engaging in a $3 billion repurchase
agreement, but I don’t see any record of it on your general ledger.” Of
course the bank would deny it had engaged in any such transactions.
With this news, I lost my appetite and felt sick. The the Fed had to
know; since our bank was not under their jurisdiction, it simply had no
other reason to be present. Ryan and I were in Pennsylvania spending most
of our vacation fishing, but my mind was so distracted that I couldn’t enjoy
it.
The next day, I called Masuda again and found out the Fed examiner
would not come until the following week. It was a huge relief, because if
the Fed suspected some sort of impropriety, it would check our books
immediately. But this would give me time to clean up loose ends. Although
I wanted to spend more time with Ryan, I decided to send him back to his
mother. When I told him I had to go to work, he nodded and said, “It’s all
right, Dad.” He was used to being disappointed by me.
I went to work on Friday. Yagi and Araki came in Saturday and Sunday
to help. In case the Fed examiner asked for monthly statements from the
dealers, we cut out the off-the-book-trades, patched them up, and made a
copy. We worked straight through the weekend until 4:30 a.m.
If the Fed examiner brought up any reference to our impropriety, I was
prepared to take him aside and tell him all about it. I would plead with him
not to make it public until the bank’s senior management could report it to
the MOF. It was important that when the public was told of the loss, the
bank made it clear that everything was under control and that it was
financially sound. This was the only way to prevent a run on deposits.
In spite of my fear, the Fed examiner came in for only two days and
didn’t show up the rest of the time. Later, I found out from Cassis the
reason a the Fed examiner sat in: Someone had sent an anonymous letter to
the Fed urging it to look into the trading operations of Daiwa Bank. I
wondered if this was the same ruthless dealer who’d blown us out on our $3
billion bond position; if not, how many other people knew the truth? And
what could the motive be?
Because of the NY State exam, the internal audit was pushed back a
week. Nancy had checked the T-Bond settlement area but found nothing.
The State exam ended in the third week of September. No one discovered
any irregularities. I was still alive.
 I had told the dealers my office was under severe scrutiny by the
internal audit team, NY State, and the Fed. So when we received a clean bill
of health from everybody, their suspicions disappeared. In fact, because of
the scrutiny we had gone through, everyone, including Yauchi, was
convinced my operation was unquestionably proper and above water.
After the ordeal, although I was much tougher now, I was also
exhausted. I had pushed my mental limits further than I had thought
possible. The only question I couldn’t answer was, ‘what for?’ Why was I
doing this? Wouldn’t it be easier to just call it quits? What would I get for
this award-winning performance? I didn’t have a clue. But that wasn’t true.
At first, all I wanted was to keep my job. Then I just wanted to leave the
bank without any stigma. That’s all I wanted and nothing else.
With the loss standing at $565 million, I knew there was no way of
recovering, so I began planning my confession again. After the fiscal half-
year, the best time would be in November. I began putting things in order
and preparing the positions so no one would suspect anything for at least a
month while the bank investigated my claim.
One thing that bothered me was the strength in the dollar. After hitting
120 in 1988, it was moving up toward 150. Because the loss that the bank
must pay was denominated in yen, an increase in the value of the dollar
increased the loss in yen without doing anything else.
Nevertheless, I was determined to confess, because the bank’s
unrealized profit on the stocks was climbing to well over $13 billion.
Although it would not be realized just for the sake of booking profits, it was
a safety net for the bank. If the bank suffered unexpected losses, the
management could sell some stocks to pay for them so its earnings would
not be affected. ‘Unrealized profits’ were a huge piggy bank.
This was definitely the time to do it, but suddenly Daiwa announced it
was going to raise $700 million capital in subordinated notes in December.
What bad timing! If I confessed, they would never be able to raise this
money, so I decided to wait until mid-February, when the money to pay for
my loss would be securely in the bank’s coffers.
Right up to the end of 1989, the Japanese stock market kept going up,
reaching almost 39,000. However, the bubble finally burst. After hitting
38,915 on the 29th of December, the Nikkei dropped precipitously to
28,000 in a matter of a few months. I began hearing that Japanese banks
had suffered large losses in stocks and bonds during the first two months.
 It had become a ritual for the three of us to go to the Japanese restaurant
down the street for mutual consolation. Yagi and I knew the chance of
recouping was remote, but Araki still hoped we would ‘get lucky.’ In the far
corner of the small restaurant, we sat at a tiny table and ate. Most of time,
we avoided discussing the loss. Although we were there to share the pain of
falling into the abyss, all we talked about was golf.
One night, I decided to bring the subject up to get them to face reality.
“You know we have to think about the bank. If we are not going to make it,
at least we should pick a good time to report it.”
Araki looked at me, shaking his head. “We can still do it, but we’ve got
to do this much,” he said. He opened his palm. His spread fingers meant $5
billion, which scared me. I thought he was beginning to lose it. How could
he think that we could carry a $5 billion position after the hell we had gone
through with a $3 billion position? I looked at Yagi’s solemn face. Although
he hadn’t suggested such a wild plan, he too wanted to continue trying to
reduce the loss. But I was determined to pull the trigger when the Japanese
stock market moved back up to the year-end level.
However, the Nikkei rose to 32,000 for a brief moment in the spring,
but plunged thereafter. With Iraq’s invasion of Kuwait, the slide accelerated,
and by the fall, the Nikkei was down to nearly 22,000. The bank lost more
than $10 billion in paper profits. Because of this, I convinced myself it
would be better for everyone to wait before disclosing my loss. The time
wasn’t right, and I was confident no one would discover my secret.
About a year earlier, my ex-wife remarried an independently wealthy
guy. I was relieved now that should anything happen to me, the kids would
be well cared for. However, the downside of this security was her need to
spend extra energy to maintain a healthy relationship with her husband.
Apparently, the kids weren’t happy with the situation and complained to me
about their mother’s lack of attention. So, one evening, I went to her house
and asked her to pay more attention to the needs of our kids. In a heated
argument, I said, “Look, if it’s too much for you, I will take the kids.” To
my surprise, she agreed. In July of 1990, I was given legal custody of my
boys, ages 10 and 12.
Coming out of the courthouse, I almost cried. My kids had no idea what
they were facing. Here I was, walking on a tight rope across the Grand
Canyon juggling twenty balls in the air, and I now had the responsibility of
raising two teenage boys as well.
 Despite my constant exhaustion, I knew it was my duty to make sure
they received the love they needed. I raged at my ex-wife for increasing my
burden, but when I calmed down, I realized I’d brought it on myself. It
wasn’t her fault.
My immediate boss, Masuda, was sent back to Japan after six years in
New York. He was a good man who helped the department grow
substantially. He was replaced by another Japanese officer, Minori, who
was two years my junior. In 1991, Araki was also sent back to Japan. For
strategic reasons, Japanese bankers were moved from one location to
another arbitrarily by the HR department without any prior notice. Refusal
to accept the transfer pretty much precluded any future promotions. When
the time came to say goodbye, I told him, “Don’t worry about anything.”
Seeing the gratitude in his face was one of my few moments of joy.
In late 1990, the headquarters’ auditors raided the New York branch
again. Two of them were waiting at the entrance for me to open the door.
“Gokuro-Sama-Desu,” I said when I saw them: I appreciate your effort.
They showed little emotion. Because we held physical securities, they
asked me to open the vault as soon as we went in. It had a six-inch concrete
wall with a huge steel door. Inside was a large safe that weighed a thousand
pounds. Although we had substantially fewer physical securities as more
securities became eligible for deposit at the DTC, at least several hundred
million dollars worth were on hand.
I took them all out for their inspection and asked if they would be
checking on the depository balances (stocks at DTC and Treasury securities
at Bankers Trust). They replied, “Yes, we’d like to have the position
statement as of yesterday.” As of yesterday? I was hoping to give them the
statement I had made at of the end of last month.
Trying to stall them, I said, “Because they only issue statements at the
end of the month, we always submitted the month-end balance.”
“No, that wouldn’t be acceptable. The audit date is yesterday, so the
statement must show the balance as of yesterday.” The older, crusty-looking
auditor was adamant.
“I understand,” I replied. “But Bankers Trust doesn’t issue a position
statement as of just any day.”
“In that case, I could go to their audit department and request it,” he
countered. From the way he spoke, I realized he knew the correct
procedure, which was for the auditor to obtain the statement directly from
the depository institution. Had any of the auditors done this in the last seven
years, my secret would have been revealed.
“Ah, no, let me give it a try,” I said. “Maybe they’ll make an
exception.” I knew they’d give me one, but it would take them a minimum
of three to four days. Then I would have to retype it with the phony
balances, which usually took two days.
“We’d like to have it by tomorrow,” he declared. “But we’ll give you
three days.”
I called Josephine at Bankers Trust and asked if she could prepare a
balance statement of all 427 issues of T-bills, T-notes, T-bonds, Fannie
Maes, Ginnie Maes, and student loans in a day. She laughed. “You know I
don’t have time for this. I am so backed up I don’t get home before 8:00
p.m.” It was true, but if our auditor made the request to their auditing
department, they’d force her to work overtime.
“Look. Let’s do this. I’ll type it for you if you can give me your
letterhead sheets and the balances of each issue.” She readily agreed. So I
picked up 30 sheets of their letterhead paper and the actual balances. When
I got home, I typed it all in six hours, producing a balance statement of the
Bankers Trust Company as of November 12, 1990, with the balances I
wanted it to show. With this document, my $600 million hole was
undetectable. I gave it to the auditor the next morning. “You were right,” I
said. “When I told them you needed it in a hurry, they prepared it in one
day.”
“Good job!” he said, proudly holding the bogus statement.
After I got the custody of my sons, because all I had was a one-bedroom
cottage, I enrolled my sons in the New York Military Academy. They did
very well in a regimented lifestyle, though they frequently asked me to buy
a bigger house. While marking time for my intended disclosure, I sold the
cottage and bought a four-bedroom house in Kinnelon, New Jersey.
My boys were thrilled to go back to their old school. For the first time, I
felt the real weight of raising two teenage sons while working fifteen hours
a day in a battlefield. To make this work, I laid down rules and assigned
responsibilities for maintaining the house: “Look guys, I am not your
mother. There is no mother in this house. Don’t think for one second that
I’ll clean up after you. All I want you to do is clean up after yourself and
stay out of trouble.” I tried to come home early and cook dinner for them,
but it was nearly impossible to get there before 8:00 p.m.
 More than $600 million of my loss was concealed by selling T-notes
owned by one particular customer: the largest investment bank in Japan.
They held nearly $1.3 billion of T-notes, but I would only sell up to half of
each issue they owned because their balance fluctuated.
By the time we got instructions from them to deliver $50 million out,
had I used all of it, I would not be able to get it back in time to make the
delivery. So, I always left some room. But because I was constantly using
more than 12 to 15 different issues, I needed to monitor their activity.
Another thing I had to keep my eye on was the interest payments. T-notes
paid interest semi-annually. When the payment day came, I had to sell
another issue to raise cash.
These interest payments represented the carrying cost of my loss.
Without any new loss, I was adding $50 million to my hole each year. I had
to spend a couple of hours each day trying to keep all the balls up in the air,
but strangely enough it was becoming second nature. The only
inconvenience was that I couldn’t delegate this manual task to anyone. It
was tedious work. I must have been the only person on Wall Street
calculating interest payments by hand.
In mid-1991, another big problem developed. The aforementioned
investment bank decided to start their own custody service and transfer all
their T-notes out of our bank! Luckily, I discovered their intention early
enough to have time to figure out something. But what? We were holding
other T-notes and T-bonds, but they were spread out among thirty customers
with $10 to $20 million of each issue. A $10 million issue was practically
useless because they could sell all in one day. I felt cornered with no way
out. Unless….
Out of desperation I came up with a great idea, if it could be done: to
buy T-notes for our own investment. After the Gulf War, the economy sank
into a recession and interest rates came down sharply. I requested to
headquarters to let us buy T-notes for our own portfolio. The head of the
International Division was none other than Yasui, for whom I had made a
presentation in Osaka on long-term T-note investing in 1989. I argued that
we should have bought them in 1989, because they were yielding well over
5%. He pushed it through, and within six months, we owned $600 million
of U.S. Treasury notes for our own account. Of course, I was in charge of
managing this. As we were getting these T-notes in, our customer began
moving his T-notes out.
 Had it not been for the declining interest rates, it would have been
impossible to hold these T-notes, because our purchase was approved on the
condition that if unrealized losses reached $2 million, we would dispose of
the whole thing at once. Once again headquarters chose to believe in a fairy
tale. Although T-notes in the maturity range of 2 to 4 years had much
smaller price movement than T-Bonds, $2 million on $600 million
represented only 0.3%, which meant any blip in interest rates would trigger
a ‘stop loss.’ I was incredibly lucky because the rates continued to drop, and
soon I had a nearly $7 million unrealized profit on these T-notes. Not that
we actually had it, since I had sold them to pay for my loss, but in theory I
had this large of a cushion.
Ironically, the better I did, the greater the hole I dug, because, sooner or
later, I would have to produce these non-existent profits. In terms of my
subterfuge, though, I was in better shape than before because I now had
control over the disposition of these notes. So borrowing them effectively
became the way to pay for my loss without involving a customer’s account.
At this point, the only risk I saw of my secret being discovered was of our
auditors contacting Bankers Trust directly, which would reveal that those T-
notes we were supposedly holding did not exist.
Although the loss was growing, my situation was looking up.
I was no longer in such imminent danger of discovery. But in early
1992, as the economy began improving, interest rates spiked up, and my
cushion was nearly gone. By March, our unrealized profit was wiped out,
and we were teetering on the verge of hitting the $2 million liquidation
point. This was a new kind of test because all our T-notes were marked to
market, and unrealized profits and losses were calculated.
Hiroshi Yamaji had been the General Manager since 1991, after Ikeda.
The General Managers switched about every three years. As a senior
director, he reported to Yasui, who by this time had been promoted to
Executive Director at the headquarters. Much like Yasui, Yamaji had a
slender build and combed his thinning hair straight back. He wore a pair of
wire-rimmed glasses and had terrible teeth. He was extremely intelligent
and mild-mannered, more of a scholar than a businessman.
When the unrealized profits on the T-notes disappeared and Yamaji saw
us facing close to a $2 million loss, he said, “Well, there is a good chance
rates could drop back down, but a rule is a rule. We’ve got to liquidate.
Don’t worry. Once rates start to come down, we can buy them again.” It
wasn’t that simple, although I couldn’t tell him that.
To prevent a forced liquidation and the revelation of my secret, I had to
devise another subterfuge. In essence, I transferred the unrealized loss into
my secret position, which was made possible by the flexible
accommodations extended by Wall Street dealers. To illustrate this, if the T-
note fell in price from 20 to 10, I would create two on-the-book-trades, a
sell and a buy. For example, selling it at 17 and buying back at 12. By
having these trades, instead of losing all 10 (from 20 to 10), we’d have lost
only 5. Instead of using my previous intricate trick involving repo trades, I
would stage a second set of trades in which I buy at 17 and sell at 12,
thereby having a loss of 5 for my off-the-book-trades. Once I knew this
would work and the dealers were willing to be part of the scheme, I no
longer had to worry about forced liquidation. I was amazed by how lucky I
was to come up with these tricks at the last possible minute.
No sooner had I thought I managed to avert a disaster, we were visited
by auditors from headquarters, who began to audit our department.
By this time the chief auditor, Cassis, owed me more than $1,500.
Before he started with our department, he asked me when a good time
would be to come down. The method of audit was to pick several random
testing dates during the previous month and check every movement of
money and securities to see if they were properly recorded. I picked dates
when I had no off-the-book-transactions. There was no tacit agreement
between us; I just picked certain dates and asked him to use them. Not
suspecting anything, he had no problem with this.
In July of 1992, we finally moved to a more respectable office in the
World Financial Center. It was three times its previous size and had a
splendid view of New York Bay from the 31st floor. There was a ten-year
lease, and Yagi planned to have a state-of-the-art trading room built.
Minori was excited because he had no idea of any loss. He had been
campaigning for a larger office because we were supposedly generating half
of the Branch’s profit.
Meanwhile, back in Japan, the stock market continued to plunge,
dropping to 14,000. Daiwa’s unrealized profit of $13 billion had vaporized.
Thirteen billion dollars! All the while I had been worrying about reporting a
$600 million loss. However, it meant that as the bank lost its $13 billion
cushion, a loss of $600 million weighed ten times heavier. After all was said
and done, while I was trying desperately to recoup $20 million, $150
million, $300 million, and finally $600 million, Daiwa’s wealth had gone
from $1 billion to $13 billion and then to zero.
 Chapter 14

The Web We Weave

After the New York office of the Bank of Credit and Commerce
International (BCCI) was closed down by Federal regulators for engaging
in a complex money-laundering scheme in 1991, the Fed began examining
the branches of all foreign banks.
Although we were still under the jurisdiction of the NY State Banking
Department, the Fed had obtained supervisory power over us. That was not
good news for me because while the State Banking Department did not
understand bond trading, the Fed did.
In October of 1992, a group of examiners from the Federal Reserve
Bank of New York walked through the branch’s doors. I was very
concerned because the Fed was in the Repo market every day and was
regarded as an unofficial guardian of the U.S. Treasury security market.
They had sent a guy to sit in with the State examiners to check us out in
1989. As I didn’t know what to expect, I didn’t know how to prepare for it.
My main concern was the trading room. We couldn’t let them see the
new state-of-the-art set-up in our downtown office. All our reports of the
branch’s business described the downtown office as solely for our custody
operation. Because the downtown office was approved only as a custody
operation center, no proprietary trading business was supposed to be
conducted there. Luckily, all ten or so examiners were given a large
conference room to work in at our midtown branch office. Nevertheless, we
needed to be sure that they would not see our sophisticated trading room.
So, just for the duration of this examination, we moved the traders to
midtown, and closed our trading room. As a matter of fact, we disguised the
trading room to look like a storage room by piling up cardboard boxes on
our desks, stacking a ladder, buckets, and whatever we could find on the
floor.
The chief the Fed examiner was in charge of looking at trading. He had
some foreign exchange trading experience himself. As the examination
progressed, it became apparent that their focus was still on the asset quality,
meaning the credit risks the bank was taking on its loans and not market
risk. As for our trading operation, when he came down to the trading room
on the seventh floor of the midtown office, there he saw traders for foreign
exchange, money market, and Treasury bonds all at their desk. As we had
added a few more chairs and trading equipment for our traders, he had no
reason whatsoever to think anything out of the ordinary was going on.
During the second week, one examiner was sent to the downtown office
to look at the custody operation. He arrived after lunch. As the manager of
the downtown office, I invited him in and showed him our office. He
glanced at the trading room, walked toward it, and actually looked in and
said, “Oh.” It was obviously not in use. I explained what we did in our
department, and he left after fifteen minutes. In the beginning, I felt I was
on thin ice, but as the examination progressed, my confidence returned. He
was no more capable than the examiners from the State Banking
Department. In addition, I noticed alcohol on his breath—but I was the one
who could have used a drink.
In the United States, there were more than 10,000 examiners at the Fed,
the Comptroller of Currency, the FDIC, and the State Banking Department
combined whose job was to check nearly 10,000 banks. They were not
auditors, but examiners whose concern was for the ‘safety and health’ of
financial institutions.
It was not their job to look for improprieties. On the other hand, internal
and external auditors were supposed to see that employees followed the
rules. To assess the operational safety, regulatory examiners would request
that a bank submit its auditor’s report. If it was satisfactory, they would
have no problem.
In other words, if violations are concealed, there is no way for
examiners to detect them. They can only go by what a bank tells them.
Hence, the truthfulness of the bank’s reports is of the utmost importance. To
enforce the truthfulness, Federal law penalizes anyone who makes false
statements to the examiners of the Federal agencies.
This had not been so in Japan. Corporate executives lied through their
teeth to the regulators with impunity. Because the majority of stocks were
owned by corporations, it was unnecessary to be tough on them; after all,
they increased employment and contributed to the rebuilding of the
economy. The need to protect investors from fraudulent information was
not recognized because it was assumed everything was done for the good of
the country.
 Even shareholders were to share the burden. Japanese corporate
structure was modeled on America, but in no way was it a pure capitalistic
society. After WWII, a new economy had been born, and the MOF literally
spoon-fed it. The collusion between government and the corporations did
not have any self-serving pecuniary objectives other than to nurture the
infrastructure, much as in a father-son relationship.
What Japan had was really social capitalism, whereas America
espoused individual capitalism. In Japan, the individual remained loyal to
his company, and individual companies maintained their loyalty to the
government. In the U.S., the individual’s loyalty belongs only to the
individual, and the corporation’s loyalty belongs only to the corporation.
In Japan, the son lies to his father with the knowledge he might be
scolded. The father accepts some falsehood because he knows the son is
trying to maneuver through life. The government expected corporations to
take care of themselves, rather than report each little irregularity. In fact,
they preferred not to be told of every problem because, once reported, if it
wasn’t concealed, it would become public information and could harm the
corporation’s image.
Since the end of the war, the MOF had been sending the unspoken
message: ‘We’re in this together. Don’t do anything harmful to our
objectives, and don’t tell us anything to strain our cozy relationship.’
The government was able to trust corporations because it knew no
corporation would deliberately do anything to harm the country, nor would
any corporate executive deliberately do anything to harm the corporation
for his own personal gain. So deliberately deceiving the Fed examiners
about our trading operation didn’t seem ‘too serious’ to Japanese
management. The crucial mistake our managers made was thinking the Fed
was a nurturing institution like the MOF.
Interest rates fell sharply in 1993 as the Fed pumped liquidity into the
system to save the ailing banks. This development had salutary effects on
me. First, due to the rise in the market value of $600 million in T-notes (the
value of T-notes changed inversely to the changes in interest rates), I had a
comfortable cushion again. Lower rates caused the dollar to drop further
against the yen. If the dollar dropped 10%, the loss to the bank decreased by
10%. I always thought of the damage I had caused in terms of yen, so
changes in the foreign exchange rate made a significant difference.
Theoretically, if the dollar fell to zero, my $700 million loss would
disappear into thin air. The dollar had declined to almost 110 yen, a drop of
50% since the 1985 Plaza Accord.
In August, Yagi was transferred back to Japan. I had known the time
would come for me to be alone in this again, and I was happy to see him go
back unscathed. He had been promoted to a higher position at headquarters.
Araki had been doing well in the corporate planning division. When Yasui
had asked me if I knew a good trader within Daiwa, I had mentioned Yagi’s
name. That had changed his life. Because I felt responsible for bringing him
into this, I was going to protect him as well as I could.
Since leaving Japan in 1969, I had carried an inferiority complex about
being Japanese. Born six years after the war, I had seen many American
soldiers walking around my occupied country. They looked scary to me as a
kid. In my early childhood, I had no concept of what the war was all about,
but I knew these men were to be avoided.
One day a man in uniform spoke to me. I must have been three or four. I
ran away screaming as if I had seen an ogre. Ever since, I had been afraid of
‘gaijin’ (foreigners), until I began watching TV shows, like Colt 45, Mr. Ed,
and Superman. During my pre-teen years, a common notion was that
anything American was superior to Japanese.
Surprisingly, in my adolescence I had been more fascinated by
American culture than most of my peers. At thirteen, I played Puff the
Magic Dragon on a guitar and regarded Peter, Paul, and Mary as my
mentors.
After attending college in the Midwest and marrying an Air Force brat,
in many ways I became an American and consciously suppressed my
Japanese heritage. Even when I started to work at Daiwa, I felt alienated
from other Japanese officers because they were ‘proper employees,’ and
their existence in the U.S. was nothing more than a temporary affair. I was
living a real life in America, while they remained in the exclusive
community of visiting Japanese businessmen. We did not share the same
concerns outside the bank. They kept busy going to the tourist spots. So
despite working at a Japanese bank, I was never one of them…until I met
Yagi. When he shared his secret with me, I felt like I had found a comrade
in a battleground where I had been fighting all alone. I got to know him
well, and through our friendship, he re-introduced me to Japanese society.
Gradually, I began to accept my heritage and, with it, the feeling of
alienation dissipated.
 After the great asset bubble burst, the Japanese banks not only suffered
a $500 billion shrinkage in their unrealized stock and land profits, but also
all the excessive lending done for speculative ventures and projects quickly
turned sour. Just as I had done with my $70,000 loss ten years earlier, the
senior management buried most of the bad loans to avoid taking
responsibility. The losses from bad debts reported by banks were $40
billion to $50 billion, but private research firms projected them at ten times
as high.
The NY State Banking examination used to take place every two years,
but when the Fed was given authority to supervise foreign banks, it decided
to examine them every year. Why did it want to tighten up the supervision
of foreign banks? Apparently the Fed was concerned about Japanese banks.
Because they had helped create the Japanese speculative bubble, they
wanted to keep an eye on them to avoid systemic problems. By this time,
with the use of derivative products, all the banks in the world were
interdependent, and a failure anywhere could paralyze the international
financial system or cause a domino effect, leading to a massive financial
crisis.
Unfortunately, the Fed had no legal authority to examine Japanese
banks in Japan. To resolve this dilemma, they obtained the right to examine
their U.S. branches. It was the next best thing.
On November 2, 1993, the senior director called me into his office for a
business meeting. I jumped on the E-train from the World Trade Center,
wondering what he had on his mind. When I opened his door, there were
Nitta, the general manager, two deputy managers, and two officers from the
U.S. planning division. All were Japanese.
Daiwa established the U.S. Planning Division (USP) in New York on
October 1, 1993, to oversee the operation of the loan-producing offices
purchased from Lloyds Bank a few years before. With this responsibility, it
took over the audit function of the branch. Cassis and Nancy were
transferred to the USP and became part of a more formal auditing team
called the USP Auditors. Cassis was not happy with this because he had to
report to two senior auditors who had come from Lloyds Bank.
The the Fed examiners were to arrive on November 7. To familiarize the
USP’s senior auditor, Webb, with the NY branch’s operations, Cassis
briefed him and told him that during the examination the traders from the
downtown office had moved to midtown. When Webb heard this, he wrote
up a report to his manager, Suzuka, stating that if this arrangement became
known to the examiners, they might take it as a trick to mislead them.
Suzuka showed this report to Yamaji, who explained, “Well, we are, in fact,
misleading the Fed, but the true motive is to conceal the downtown trading
operation from the MOF, not the Fed.” This explanation made no sense to
Webb. Had he been a Japanese auditor, Yamaji would have told him to take
a hike. But Webb was an outsider. So, the director ordered a full research
into the legal implications of having a trading operation in our downtown
office.
The report that came back from the USP was on the table. Yamaji told
me to read it. It stated that conducting a trading operation at the downtown
office was, in fact, a violation of the New York State Banking law, which
prohibited any banking operation that involved outside parties at a location
not licensed as a branch. “It is regrettable, but we must move the trading
operation to midtown,” Yamaji decided. After seven years of deception,
Daiwa finally decided to do it right.
As for me, he asked if I could supervise them from downtown. I had no
choice. Because he didn’t know I was still trading, he didn’t see any
problem with my being physically separated from the traders. “We will set
up a desk in midtown so you can come here as often as you’d like,” he said.
So I spun off the mock trading department I had created to pacify Yasui,
and now I was back to being by myself, as I had been in 1988.
According to the banking laws, I shouldn’t be doing any on-the-book-
trading, but if our T-notes began to erode in price, I would have to do some
trades. It made no difference in my off-the-book-trading. As long as I had a
phone and a monitor, I was able to put on a $3 billion position anytime
without anyone knowing.
Just when I thought the problem was resolved, a more serious matter
came up. Davis Polk, a reputable New York law firm the U.S.P used to
research NY banking law, advised Daiwa to admit to the Fed examiners
about the deception during the previous year’s examination. The examiners
were to arrive in four days.
The same group gathered in Yamaji’s office again. All but Yamaji and I
were for the admission. Yamaji was understandably reluctant to admit to
trickery because it would make him look bad as the head of the
organization. I was against it because, if the Fed felt they’d been deceived,
they’d want to turn my trading operation upside down to find anything else
we might be hiding. I could not allow that to happen.
“Honesty is the best policy. Since we were doing this to hide it from the
MOF, they have no reason to be pissed off,” Suzuka said. He was the head
of the U.S. planning division, and he insisted we come clean. Suzuka and I
were the same age, and we worked together at the New York branch back in
the early 1980s. He was a foreign exchange trader then, but had since
moved up the ranks rapidly in the overseas operations. He was the one who
had spoken to the lawyer.
“I agree with Suzuka,” added Nitta, the general manager. “We may be
reprimanded, but it’s much better than getting caught later.” He was all for
it because he hadn’t been in New York the year before. Two deputy
managers also agreed.
“Wait a minute. We didn’t deliberately deceive them,” I argued. “The
examiner who came to my office last year didn’t ask if there was a trading
operation there, so I said nothing. If we didn’t intentionally misrepresent
anything, what are we confessing to? You may think this would be a
harmless confession, but the Fed won’t take it that way. They’ll want to
know what the hell was going on.”
“Right. What are we afraid of?” Suzuka asked nonchalantly. “There is
nothing going on. So let them investigate whatever they want—to their
hearts’ content.” He didn’t realize the problem.
“I, too, feel it may cause unnecessary turmoil,” Yamaji firmly
countered. “Since we didn’t know it was a violation until last week, we
really had no reason to hide anything from the Fed. Now that we know it
and have corrected the situation, why bother bringing it up?” He supported
me, but for his own reason.
“I understand the point, sir,” Nitta turned to Yamaji. “But we can’t go
against the opinion of Davis Polk.” This was the only compelling reason to
confess.
“Their opinion is invalid because it is based on partial information,” I
argued. “The first thing they’d ask is why we had to deceive them. We can’t
give them the real reason.”
“Why not?” Suzuka asked with a blank expression.
“Why not? Are we going to admit we had to deceive them so the MOF
wouldn’t learn how we’d tricked them for seven years from their
examination report? Do you think they’d just say, ‘That’s okay, we
understand?’”
“No, we can’t say anything about the MOF. That’s suicidal!” Nitta
jumped in.
“Of course not. We’ll just tell them we have nothing to hide,” a deputy
manager added. They were terrified of the wrath of the MOF.
“That’s ridiculous! So, you’re going to say, ‘We misled you, lied to you,
and fooled you, but for no reason. Trust us?’” There was no response to
this.
It was Yamaji’s call. He was the boss. Being a righteous man, he
couldn’t just ignore the opinion of the reputable law firm of Davis Polk. To
prevent him from making a hasty decision, I made this suggestion: “Okay,
send the lawyer to my office tomorrow and let me talk to him. I think he’s
got something mixed up.”
The next day, Suzuka brought three Davis Polk attorneys to the
downtown office. First, they looked around. I showed them where the
trading operation had been--the place of the deception. Back in the
conference room, the Q&A session began. Three lawyers stared into my
eyes as if they could see inside my mind.
“Tell us why you conducted a trading operation in the downtown
office,” a young, sharp-looking lawyer asked.
“I was in charge of both the trading and the custody operations when the
branch moved to midtown.”
I explained why the custody department had to stay downtown.
“Couldn’t the branch move the trading operation to the midtown
office?”
“There was no trading operation per se. I wore two hats, and they
couldn’t split me.” I explained how the trading business had developed out
of thin air in the mid-1980s.
“Okay, now I understand why you have this awkward arrangement, but
there is something you aren’t telling me.” He was sharp. I knew exactly
how his brain was working. Everything made sense except for one thing.
“Why did you have to move your traders during the regulatory
examinations?”
Suzuka tried to obfuscate the issue, but I knew the lawyer would not let
it go and figured my only chance to sway their opinion would be to tell
them the ‘truth.’ “I think we’d better tell them,” I told Suzuka, who nodded.
I explained how we had violated the MOF’s conditions by conducting a
bond trading business downtown.
“Although we had nothing to hide from the Fed, we were taking a
precautionary measure since we submit the Fed’s examination report to the
MOF.” Suzuka added.
The lawyer was satisfied and had no more questions. But that afternoon,
I was told Davis Polk had reiterated their advice to admit our deception to
the Fed and tell them the complete story.
On November 6, 1993, two days before the Fed examination, Yamaji,
Nitta, Suzuka, and I gathered at Yamaji’s apartment on the Upper East Side
to make the final decision on whether to admit our deception from the
previous year’s exam. Suzuka and Nitta were dead set on admitting it. They
would not be held responsible for what had happened in the prior year
because they weren’t in charge then, but would be held responsible if they
agreed to the silence and it was discovered later. Yamaji was more afraid of
the consequences because he’d have to take the blame. He feared not only
the Fed but also the MOF. He could imagine the furor of the MOF when it
learned Daiwa had been duping them for seven years and now was in
trouble with the Fed because of this. He was a typical Tokyo University
elite graduate who had never made a blunder in his life. But a severe
reprimand from the MOF could end his career.
“What’s done is done,” I insisted. “Now that we’ve corrected the
situation, there is no use in bringing it up. The MOF would not take this
lightly.” Every time I mentioned the MOF, Yamaji’s eyebrows sagged. After
a half hour of discussion, Yamaji said softly, “I can’t make the decision by
myself. I’ll call Mr. Yasui tonight.” It was too much for him. I regretted not
pushing him to decide not to admit, because there was nothing more I could
do if Yasui told us to go ahead.
We all walked out of the apartment and strolled down Third Avenue. I
left the others, who were going to have dinner together. Before I departed, I
told Yamaji, “If the Fed turns everything upside down, they might even find
Daiwa Trust’s problem.” He acknowledged my warning but just nodded. I
was fishing, but did not get a bite, and never did find out the complete story
about this parallel case. It was all up to Yasui. If we reported our trickery of
the previous year to the Fed, I knew my secret would be unearthed. There
wasn’t any chance the Fed and the MOF would ignore the whole situation.
The regulators didn’t like to be duped by highly-paid bankers, and I was the
one on whom they would vent their wrath.
Yamaji called me at home that evening and told me Yasui had instructed
him not to admit anything and to get an opinion from another law firm,
Sullivan and Cromwell. My body jumped in relief. Perhaps Yasui was more
concerned about the Daiwa Trust problem getting dredged up than I had
realized.
November 8 was the date of the examination. This year it was
conducted jointly by the Fed and the State. They were to spend six to seven
weeks in the large conference room in our midtown office. Yamaji’s office
was down the hall. The chief examiner from the Fed was the same person as
the previous year, Mr. Early. He was about 50, of medium build, and was
balding. Most of the time he wore a pair of reading glasses perched at the
tip of his large nose. There were four other the Fed examiners, and the State
had four as well. They all sat on one side of the long conference table, and
we sat on the other; there were nine of us, in all. On the first day, we
introduced each other, and the Chief Examiner gave us a brief overview of
the schedule. Yamaji acted upbeat, despite his sense of dread.
A few hours later, we were in another conference room on the floor
below with a lawyer from Sullivan and Cromwell. Yamaji, Nitta, and I
explained the situation to Art Thies, who had been our lawyer for many
years. Davis Polk had been retained by the USP. After listening to our story
intently, Thies said, “So, you have moved the traders to the midtown office
permanently. In other words, Daiwa realized the potential problem and
corrected the situation. What happened last year is done, and since it wasn’t
intended to hide any impropriety, there is no point bringing it up now. The
case is closed.” He looked like God to me. Yamaji’s face loosened in relief.
Thies couldn’t understand why we were so worried. “By the way,” Nitta
said, pulling a folded piece of paper from the inside pocket of his suit
jacket, “I have this letter from Davis Polk. Is it all right to disregard it?” He
handed it to Thies.
As Thies perused it, the smile disappeared from his face and his lips
curled. “As long as this letter exists, you have to tell the Fed what happened
last year,” he said, completely reversing himself.
“Why is that?” I asked, unable to see how a piece of paper could change
the situation so drastically.
 “In this country, once you receive an instruction from a lawyer in
writing, you must abide by it, because lawyers are officers of the court.” I
was furious with Nitta. Because he didn’t understand English very well,
every time he talked to a lawyer, he asked them to put it in writing so he
would not be blamed later for misunderstanding what was said. Both
Yamaji and I sank deeply into the sofa. The decision was made, and even
Yasui couldn’t override it.
With a solemn expression, Yamaji asked, “So, we should tell them
soon?”
“The sooner the better. In fact, I think you should be the one to inform
them,” Thies added, pointing at me.
“Me?”
“Yes, you are in charge of trading and the custody business. They may
not feel it is as serious if it comes from you rather than Mr. Yamaji.” All
nodded their heads, looking at me. What an irony! I was the one who
opposed this idea most and now I had to tell the Chief Examiner we had
duped them. I accepted the mission, but requested that Toriumi, the head of
the money and foreign exchange trading area, accompany me.
On November 12, Toriumi and I sat across from Mr. Early in the small
conference area next to the trading room. First, we explained how our
business had been conducted. Mr. Early had done some foreign exchange
trading himself, but was not familiar with bond trading. After Toriumi
explained his current posture on FX trading, I said, “Mr. Early, there is one
thing I need you to be aware of.” My heart rate shot up. “Until last week,
our bond trading operation was run at our downtown office, because I am
also in charge of our securities custody area.”
“I wasn’t aware of that,” Early commented, looking puzzled.
“Well, as a matter of fact, during the last examination, we stationed our
bond traders up here.”
“Yes, I am sure I met several bond traders here.”
“The reason we brought them here is a little complicated. When the
branch moved from downtown, I was in charge of the Custody Department
and also bond trading. But the MOF told us not to conduct any normal
banking business at the downtown office.”
“But you have been trading at the downtown office.”
“Right, because I couldn’t be at two places at the same time. So during
the last examination, we moved the traders to the midtown office in case
your report showed their location. The MOF reads your reports, you know.”
My mouth was drying up.
“Wait a minute, I sent Johnson for two days last year to check out the
downtown office.” Two days, he said.
“He visited us for about fifteen minutes,” I corrected him.
“That’s not possible…he was there for two days…was he drinking
again?” Early rubbed his balding head. This was a valuable piece of
information, I thought. “At any rate, it isn’t right for you to be in charge of
both the trading and the securities custody area because of the need for a
Chinese Wall.” What he meant was that I could use the clients’ investment
information to benefit our proprietary trading. He was completely wrong
because we were not dealing with stocks, but I quickly thought of how I
could use this as a diversionary tactic.
“Personally, I don’t think anything we learn from our clients’
investments which helps our trading, yet in theory you are right,” I agreed.
“Whether or not you actually use the information is not the question, but
it would be a sounder practice to separate the responsibilities.”
“You’re right,” I conceded, wanting to make him feel good.
“Okay, then. I want you to submit a report to me, describing what
happened last year and the reasons for these things. And also what the bank
intends to do about your dual responsibility.”
“Do we address the letter to the NY State Banking Department also?”
“No, that’s not necessary. Make sure you hand the letter to me
personally.” I wondered what that meant, in terms of his intentions. My
speculation was that he didn’t want the NY State examiners to know the
Fed’s blunder. After all, the Fed was invading their territory.
Afterward, I went to Yamaji’s office and told him what had been said.
He was not too excited about making a formal report in writing, but he had
no choice. We asked Thies to draft the letter. It contained all the facts,
including our desire to keep the MOF in the dark and our decision to limit
my responsibility to only the securities’ custody department. With this, I
was officially no longer the head of the bond trading department.
Each day, I felt a layer of my protection being peeled away. But my
secret had to be guarded with my life. As long as I remained as the head of
the custody department, I could keep it going. Yamaji knew that without my
supervision, the junior traders would not be successful, so he asked me if I
would be willing to move to the midtown office and just head the trading
department. I told him that it would be a demotion. He and Nitta came up
with an alternative plan: “You could unofficially supervise the traders over
the phone.”
Several days later, we submitted a letter describing what I had told Mr.
Early. When we handed the letter to Early, Nitta, in an attempt to mitigate
our responsibility, said, “We would like you to understand that we had no
intention of deceiving the Fed, nor have we anything to hide. It was all done
to keep certain facts from the MOF. If you think it may help, you can
investigate our trading operation until you are completely satisfied.”
My God, this moron didn’t know when to stop!
Thus challenged, Early responded, “Of course we’ll conduct an
investigation of the bond trading operation and the downtown office.” I
almost fainted.
This was it. This was what I had been trying to avoid all along. Now my
exposure was ordained. The Federal Reserve Bank of New York will
conduct a special audit of my office, looking for a hole! Ironically, my $800
million hole was in their building.
All the Treasury securities were held at the Federal Reserve Bank of
New York. Since our T-notes were held in a BTC account at the Fed, my
hole was at the Fed. How hard would it be for them to figure this out?
I was closer than ever to a complete breakdown. There just wasn’t any
way out. No more wiggle space. My days were numbered!
Not knowing what kind of the predicament Daiwa was falling into,
Nitta voiced his concern: “Are you going to report this to the MOF?”
“No, we don’t have any direct contact with them,” Mr. Early said, as if
he didn’t care for the MOF. Nitta’s face brightened in relief. This meant at
least I didn’t have to worry about the MOF getting all pissed off and raiding
our office.
I began to breathe a little easier, until I came down to the trading room
to get my coat and briefcase and found a fax for me from Kondo, my
deputy in the custody department that rattled me to the core:
“Maggie (in charge of Treasury settlement) said we are unable to make
delivery of the two issues listed below for our client because you have used
them. Please call me immediately.” Kondo supervised the DTC (stock
settlement) and dividend areas while I supervised the BTC (Treasury
securities settlement) and money transfer. He had no idea what Maggie
meant when she said, “Mr. Iguchi has used them.” This had happened a
number of times before, but I was always there to straighten it out
immediately. Besides, I always checked in the morning to make sure there
were no deliveries scheduled for the issues I had ‘borrowed.’ By this time
the loss was in excess of $800 million, so I had to ‘borrow’ more than $200
million from our client just to cover the holding costs. But this morning, I
had been too distracted to think about it.
The trader who handed me the fax had been my deputy in the custody
area. While waiting for me to come back from the meeting, he must have
been wondering, “Why did he have to ‘use’ those issues we don’t even
trade?” I felt like a boxer who had taken a punch on the nose after the bell.
For a second, the lights dimmed, the movement of the people slowed, and
the voices around me seemed hollow and distant. I was either having a heart
attack, or all my senses had just shut down.
I picked up the phone and called Kondo. “Kondo-kun, I got your fax.
Maggie must be confused with something. I’ll call her and take care of it.
Don’t worry.”
“I am sorry to have bothered you, Mr. Iguchi. I would have taken care
of it myself, but I didn’t understand what the problem was.” Kondo was an
exemplary deputy who would go any distance to assist his boss.
“Don’t worry, it’s not much of a problem.” Not for him perhaps.
It was nearly 3:30 p.m. To buy those two issues and have them
delivered through the Fed wire system, I had to sell something else to cover
the purchase cost. Usually, Treasury security transactions were settled the
following day. It is called ‘regular settlement,’ or T+1. However,
technically they could be bought and settled on the same day before the Fed
wire closed at 4:00 p.m. That was called ‘cash settlement.’ I still had thirty
minutes to conduct these transactions, but I couldn’t do it in the midtown
trading room.
I left the office and jumped in a cab. First, I called Maggie on my cell
phone. “Maggie, sorry I couldn’t call you sooner. Tell the dealer we’ll
deliver the issues.”
“When I told Kondo you had sold those issues, he looked incredulous.”
A touch of apprehension appeared in her voice. She knew I was doing
something that was not kosher, but she didn’t know the extent of the
impropriety.
“Don’t worry about it. I straightened him out. I’ve got to go.”
 Then I called several dealers. The biggest hurdle was to find one who
had those particular issues in his inventory and could deliver out in ten
minutes. I had to call three before I found one. It was already 3:50. “Deliver
them right away! Please,” I begged. Then I had to sell other issues to raise
$25 million to cover the cost. The problem was that I didn’t have a list of
the securities our clients owned, so I had to sell $25 million worth without
knowing what we actually owned— trusting my memory. It was a nerve-
wracking race against time, a test of Wall Street efficiency, a test of my will.
The salesman who executed the trade had to contact his back office to
make the delivery immediately. Then the back office clerk had to call his
clearing bank (all Treasury securities are held in the NY clearing bank’s
account at the Fed.) The clearing bank then had to send a wire to the The
Federal Reserve to transfer those two issues to the Bankers Trust for
Daiwa’s account. Upon transferring them, the Fed had to notify Bankers
Trust. All this had to be done by 3:59 p.m. for Bankers Trust to make the
delivery. All of this had to happen in ten minutes without any hitch.
My fate was in the hands of the Wall Street clerks. It was 3:52 when all
my instructions were issued. I fell back in the seat and closed my eyes. I
had the sensation of floating in space, like an untethered balloon. By the
time I reached my office, I would know the result. I calculated the chance of
everything working out in such a short period of time as less than 40%. I
didn’t have enough energy left to even pray. I just wanted to sleep….
It was 4:07 when I reached the World Financial Center and walked up
the marble steps to the concourse level’s elevator. By this time, I was
resigned to accept whatever transpired. One can have only so many close
calls. Indeed, the fact that I was still there was miraculous.
I could almost see Maggie, Kondo and the others running around in an
effort trying to figure out what was going on. It was a scene of
pandemonium. The elevator reached my floor. I felt like just running away.
Running away to some place and hiding. This must have been what Nick
Leeson felt, I thought. If it were a dream, I would force myself to wake up.
The hallway was deadly quiet. I hesitated for a second in front of the
door, took a deep breath, and walked in as though I were a condemned man
walking to his doom. The moment the entire office was in my view I knew I
had survived yet again. Kondo was at his desk working as usual. Maggie
was working at her desk as well. Everything seemed ordinary. I walked
over to Maggie and asked her, “How did it go?” She looked up with a
don’t-ever-do-this again expression and said, “Everything’s settled, thank
God!”
The next day Early notified me that he was sending an examiner to the
downtown office to conduct a special audit. And he also assigned another
examiner who was more knowledgeable in trading to assist him.
It was Early vs Iguchi. He will come at me with everything he’s got.
Being defrauded in the previous year’s examination, he’d have to use every
available resource at the Fed to detect my impropriety. I was sure that as a
chief examiner of the Fed, he had to know where to look for a specific
problem. Realizing that I had been in charge of the front and the back office
for more than ten years, his focus would have to be in the operational risk.
Not knowing what his plans were, there was not much I can do to
prepare for it. However, I was not exactly a novice in dealing with auditors
either. In fact, I had a record of 136-0 with various kinds of auditors.
The special the Fed examiner arrived the next morning alone. And it
was none other than the inebriated examiner from the previous year. He had
been assigned this job because he had failed to detect an obvious trick. I felt
relieved because he was not very keen or familiar with the trading business.
While he looked into our trades and those of our clients to detect any
correlation, another examiner in the midtown office was looking into the
bond trading operation. For four weeks I stayed by them, providing
whatever they needed. They spent entire days with their faces buried in the
ledgers and journals.
Yasui requested a daily report from me on their investigation because he
was concerned they might dig in the wrong place and unearth some of his
skeletons. After two weeks, I could gauge the depth of their knowledge and
ability to detect flaws. Unfortunately (or fortunately, for me), they were not
able to unearth anything. But I remained vigilant until the moment they
declared it was over.
Four weeks later, the Federal Reserve Bank examiners concluded there
were no irregularities in the operation of the custody department or the
bond trading department. A clean bill of health was given to me by the
highest authority in the banking business: the Federal Reserve Bank! With
this, my secret was securely sealed, and any residue of concern or suspicion
about my trading operation in the minds of my bosses and the auditors was
completely wiped away. This was not the first time I felt the presence of a
higher power. Something or somebody was keeping me alive. Why? I had
no idea.
Now, my only concern was what Early would do with our letter;
whether he would mention this incident in his report. If he did, the MOF
would see it, in which case they would send a band of examiners to turn my
office upside down, if not close it for good. It was a tough call for him
because he had failed to detect our ruse during the previous year’s
examination. Since the deception had been proven benign, he could forget
it. He must have considered that, because the NY state examiners were
unaware of it.
Coincidentally, there was a movement in Congress to remove the Fed’s
power to examine banks. Congress felt the Fed had been getting too
powerful as an independent institution. The the Fed contended that to have
an effective monetary policy, it had to maintain the tools to examine and
enforce the health and soundness of the banks that created money through
credit extension.
Much like Congress, the NY State Banking Department had also been
shoved aside by the mighty the Fed. Though they were conducting the
examination jointly, it was obvious who was running the show. But
revealing this blunder by the Fed the power could shift toward the NY boys.
I saw this dilemma in Early’s face. It had been almost seven weeks since the
examination started. They were scheduled to finish by the year’s end and
have a review session with the management on January 8, 1994.
A few days before Christmas, I received a call from my mother in
Japan. She asked me to come home for the holidays because my father was
very ill. She didn’t think he would last much longer. Taking a week off from
work was dangerous. Although the examination was almost done, we still
had unfinished business. I had to think hard. This would probably be the
last time I would see him. For the last ten years, I had been trying not to
think about him. I wanted him to forget about me because I was not
anything like the image he had formed of me. At times I had wished him
dead so he wouldn’t see the truth when it came out. Now my wish was
coming true. On the other hand, I had dreamed of a day when I could talk to
him with an open heart, but that was not going to happen. At this point, I
wanted his last feelings about me to be ones of pride, even if it was based
on a lie. So I told my mother, “Yes, I will be home for New Year’s Day.”
 Before I went, I wanted to do everything possible to convince the Fed
not to make its information public. The day before my departure, I asked
Early if I could talk to him. He was heading back to his office downtown,
so he suggested we talk on the way there. I agreed, and we got on the
subway. Amidst the screeching noise of the underground, I tried explaining
the power of the MOF and how this incident could affect Daiwa’s position
with them in the future. He was sympathetic, but said, “The top
management of the Fed NY is deliberating about what to do. It’s out of my
hands.” So, I left for Japan without knowing what the Fed was going to do.
My father was very fragile, but able to talk. We reminisced about the
old days, about the time we spent in New York during the summer of 1969,
the fishing trip off Sheepshead Bay in which I caught the biggest flounder
and won a prize; taking a ride on the Cyclone at Coney Island, where we
both turned white in fear; the Yonker’s Race Track; walking up the stairs of
the Statue of Liberty; and, visiting Mohonk Lake in upstate New York.
Those had been days of wonder, and endless hope. America was so vast, so
accommodating, and so full of opportunities for an eighteen-year old boy.
After a week I said goodbye to my father, probably for good. When I
returned, I learned the Fed had notified the NY State Banking Department
of the 1992 incident. That meant the decision had been reached to release
the information. At the final review on January 8, 1994, Early told the
management of Daiwa’s New York Branch that what it had done during the
examination in 1992 was a violation of U.S.C 1005 Section 18 (that is, it is
a Federal crime to make false statements to the agents of the Federal
government.) After telling us how unprofessional and unethical it had been
for the management to deceive him, he said in a stern voice, “The Federal
Reserve Board in Washington D.C. is currently deliberating the form of
punishment. Also, you are ordered to report this incident in its entirety to
the Ministry of Finance in Japan.” His voice echoed as if it were coming
from the top of a holy mountain.
Yasui was furious. Everything seemed to be going wrong. Now he was
obligated by the Fed to report this embarrassing incident to the MOF. On a
snowy morning in mid-January, Yasui visited the banking department of the
MOF with the deputy CEO, Danno. The officers of the banking department
ignored Yasui and spoke to Danno, “We are appalled at the cheap trickery
Daiwa concocted and take it very seriously. However, until we know
exactly what sort of punitive measures the Fed decides on, we cannot do
anything. So we want you to report any development with the Fed to us,
and expect you to do everything you can to remedy the situation.” In
essence, they were telling us that they had no contact directly with the Fed,
nor did they have an independent authority to determine their own punitive
measure.
The waiting game started. The the Fed would not tell us when the
decision would be made. Everything at Daiwa’s New York Branch was in
limbo, waiting for a verdict from the Federal Reserve Board, then headed
by Alan Greenspan. The MOF urged us to visit the NY the Fed and make
the point that we would never lie to them again. Yamaji, Nitta, Suzuka, and
I visited the NY the Fed and the NY State Banking officials and apologized
for our unethical behavior, but all they could tell us was, “It is being
deliberated in Washington.”
On March 1, I received a phone call from my mother in Kobe informing
me that my father was in critical condition. I had to go. After a twenty-hour
journey, I arrived at the hospital only to find him unconscious. My father
passed away the following day. Looking at his peaceful face, I told him,
“Dad, I am glad you died with good memories of me.” I stayed through the
funeral, met all my relatives, and came back to face the harsh reality.
But nothing happened in March. The MOF was getting jittery.
Technically, Daiwa could be given a ‘cease and desist’ order, which meant
losing their banking license. Also, a criminal fine could be imposed if the
episode was reported to the Justice Department. Obviously they were
enjoying wielding power over a Japanese bank.
Nothing happened in April either. The MOF was furious at Daiwa for
not actively taking steps to ensure light punishment. But we’d done
everything we could. It was puzzling to me why the MOF couldn’t contact
the Fed to go easy on us. Instead, we got word the MOF was going to send
a team of examiners to audit us in May. Another audit by the MOF!
Apparently, they felt the Fed was waiting for regulators from the home
country to take the initiative. I’d heard the MOF’s auditors were very
thorough and tough, no-nonsense guys who enjoyed torturing bankers. They
were called ‘non-career’ as opposed to ‘career,’ which meant they didn’t get
to move up the ladder. Supposedly, they hated successful bankers.
Throughout this ordeal, I’d been contacting Araki and Yagi. Araki
worked for the planning department at headquarters, where all the notices
from the MOF first arrived. I asked him to find out the examiner’s schedule.
He was also concerned when he heard the MOF examiners were coming to
New York to audit our bond trading operation. In a few days, he managed to
obtain their schedule and told me not to worry. What it revealed was simply
unbelievable: They were to arrive in New York on Sunday, spend Monday
morning at Daiwa’s New York Branch, and then head to Chicago, Colorado,
and Las Vegas. It was an itinerary for a sightseeing tour! And that was
exactly what they did. Five examiners came to the midtown office, talked to
Yamaji for about an hour, and left. Then they visited the NY the Fed for a
few minutes.
So this was what the MOF was all about. All these years, bankers were
fearful of the MOF, which had threatened to close down any institution it
didn’t like. But it was a bluff, like a father who tells his kids they’ll be
grounded forever if they behave badly.
A week later, we finally received the Fed’s decision. It said: “Daiwa
engineered trickery in hopes of deceiving the Fed examiner and made false
statements. Daiwa’s act is a violation of 18USC1005. The Federal Reserve
Board hereby requests the management of Daiwa here and in Japan never to
engage in this sort of unethical conduct again.”
Following this decision, the MOF announced its own punitive measure.
Not only had we duped them for seven years, but also we had contrived a
scheme during the Fed exam to keep them in the dark—and failed. Even at
this point, we had no intention of being forthright with the MOF, and had
only come forward at the Fed’s order. The MOF demanded that Yasui and
Yamaji receive a verbal reprimand from the CEO. All the general managers
and deputy general managers of the New York branch during the last seven
years were to receive $3,000 less in their bonus that year. It was incredible!
A month later, Yasui was promoted to deputy CEO, the number 2 position
in the organization.
It should have all been over. Every development had followed the worst
possible scenario. The custody and bond trading operations that had been
inconspicuous for seven years came under a bright spotlight for nearly eight
months. My operation was placed under the microscope of the most
powerful regulatory agencies both sides of the Pacific. Yet my secret was
intact. I don’t know why, but I felt something was protecting me; something
much bigger than the Fed or the MOF. With a force like this on my side,
how could I not win in the end?
 Chapter 15

A Saving Grace
During the past six months, I hadn’t attended to the needs of my kids as
much as I would have liked. Furthermore, their mother spent the winter
months in Florida. Just as the latest round of audits was winding down at
the bank, I received a call from the probation officer. Ben’s urine had tested
positive for marijuana, and we were required to appear in court.
At our appearance, I explained to the judge that I was the sole custodian
of my son and had been extraordinarily busy at my work. I pleaded for him
to go easy and promised I would be more involved in his life. But the judge
saw me as an irresponsible parent and showed no sympathy. Ben was
ordered to attend drug counseling twice a week and do another sixty hours
of community service. I was furious.
On the way home, I asked him why he had gotten into this problem.
“Everyone uses pot. Other kids use even harder stuff.”
“But everyone isn’t on probation like you.”
“I didn’t think I was gonna be tested then.”
“So you were just unlucky?”
“Yeah, but I’ll be all right. Don’t worry about me.”
“I have to worry, because every time you get into trouble, I have to drop
everything at work to get here, and right now I can’t afford it. I can’t
explain why, but please believe me.”
It didn’t make any sense to him; I had not given him enough
information to understand my own dangers. It sounded like I was ducking
my responsibility, but I couldn’t tell him how risky it was for me to leave
work at a moment’s notice.
As I couldn’t count on his mother, I needed to do something about it.
The only solution was to hire someone to supervise him after school. I
remembered a trader’s assistant who worked for us the year before. The last
time I had spoken to her, she had been looking for part-time work.
Her name was Akemi. After graduating from college, she came to New
York in search of a job. At just about the same time, my trading group was
looking for an assistant. For this entry-level position, paying only $24,000 a
year, we required someone with bilingual ability, a four-year degree from an
American college, and a pleasant personality. She came into our office for
an interview and was hired on the spot. Although she had brightened up the
trading area and gotten along well with everybody, within a year, she had
decided to go back to school to study business.
Even though I hadn’t seen her since then, her image had frequently
crossed my mind. She had been very helpful throughout a difficult period,
keeping up the morale of the bond trading department. Knowing she had
taught at high school, I called her and asked if she could look after my kids.
She agreed and began driving Ben to each counseling session and the
meetings at the probation office.
In the fall of 1994, I had to run through more land mines. The
headquarters’ audit and another the Fed examination were slated for
September, October, and November. And that wasn’t all. During these
months, short-term interest rates soared, and the prices of our $600 million
in T-notes dropped precipitously, forcing me to use a combination of futures
contracts, basis trades (futures against cash), and on-and off-the-book trades
to keep from showing more than a $2 million loss. It was particularly
difficult because I wasn’t supposed to be trading. Since a year ago, I had
been no longer a trader.
Nevertheless, I had to do what had to be done.
When two-year T-notes skyrocketed from 6% to 8% during this period,
I had to mask a $20 million loss in our portfolio to avoid forced liquidation.
There I was, conducting trade after trade in various markets when I was no
longer the head of the trading department. I reported all my on-the-book
trades to my traders in midtown, who would write the tickets as if they had
done the trades. The head of the midtown traders signed each one. By
November the Fed examiners were crawling all over the midtown office. In
case one of them suddenly dropped in, I had my quote machine stashed in a
cabinet so I could close the door at once if necessary.
When the market makes a large move, some financial casualty always
seems to surface. The first of these incidents was at a dealer that I had used
a lot: Kidder Peabody. A trader named Joe Jett was accused of concocting a
profit when he was actually losing $350 million. As a result of this scandal,
Kidder, which was a subsidiary of GE at the time, closed its doors.
Two weeks later, Tokyo Securities, a medium-sized dealer in Japan,
revealed that its bond trading manager had lost $320 million through
unauthorized trading. Despite the general outcry, I knew well how
irresistible this temptation could be. The market was not ready to relax its
tightening grip. Short-term interest rates soared almost vertically, and a
crack appeared in California. In November, Orange County announced its
Treasurer had blown $2 billion in mortgage-backed securities.
Despite Akemi’s help, things remained volatile at home. Ryan, my
younger son, took drugs with his girlfriend at her house. She went into a
convulsion and was rushed to a hospital. This was the first time I learned of
him taking any sort of drug.
It just wasn’t working out. The kids needed more supervision. So I
asked my ex-wife to take one of them. She agreed, and Ryan moved to his
mother’s house. It was unfortunate, because my sons were not failures—just
normal high-school kids in the suburbs who had tasted too much teenage
freedom.
On December 3, 1994, in the midst of the Fed examination, Ben was
arrested at a friend’s house with ten other kids for drinking beer. All of them
were let go with a warning, but the police sent a report on Ben to the court
because he was on probation. Again, we were called before the judge. I was
fuming with rage, more at myself than anyone else, but I needed to vent my
anger. I blared at the judge, “My son had some beer with other boys, despite
being on probation. There is no excuse for that. However, since he appeared
before you the last time, he hasn’t used marijuana, and has joined the
football team. He is also studying hard to be accepted at a college. Because
of his good efforts, I allowed him to go to the party. I wasn’t aware they
would drink beer.”
The judge wasn’t impressed. “What I am trying to do is to teach him
what happens if he breaks the law, however minor it is,” he said.
“Do you understand that he has broken the law?”
“Of course I do, but…it was only a beer.”
“The counselor’s report shows he has been drinking beer on and off. I
am going to order him to enter a drug rehabilitation program for one
month.”
I couldn’t believe my ears. Akemi also was furious. It just wasn’t fair.
Didn’t the judge realize that all this would do would be to make Ben
distrust the system and become more rebellious? He was on the right track,
thanks to her efforts. She had been taking him to an SAT school to improve
his score. This was the first time he’d had any beer in months.
 Two weeks later, we drove him to a drug rehab in the backwoods of
Pennsylvania. It was nothing more than a renovated ski lodge. When we
pulled into the parking lot, about fifteen teenagers were smoking cigarettes
outside. We went in and talked to other parents, learning that most of these
kids were addicted to hard drugs. I felt bad for my son. Had I been around
to check on him, he would never have driven the Jeep, and none of this
would have happened. Because he was put on probation from the accident,
he was now classified as a drug addict, instead of playing football and
preparing for college.
These problems had an unexpected upside: Through working together,
Akemi and I became close. Before I realized what was happening, we cared
a lot for each other. The only bright spot in my life was when I saw her.
She was determined to send Ben to Colby College in Maine. In mid-
January, we took him out of the rehab and drove in a blizzard to Waterville.
We were delighted Ben hadn’t lost his enthusiasm to do well, and he was
ready to put his anger at the system behind him.
We had a good interview and a tour of the school. Looking at the
beautiful campus of the old New England college, I almost forgot the
predicament I was in.
In May, Daiwa Bank’s New York Branch moved to a new office at 666
Fifth Avenue. What an address! Yamaji was transferred back to
headquarters to take over Yasui’s job leading the International Division.
Replacing Yamaji was Tsuda, who had worked under Yasui in 1987 to bury
Daiwa Trust’s $100 million loss.
I began thinking seriously about ending my charade of eleven years.
The loss had grown to more than $950 million, but the steep decline in the
U.S. dollar was causing the loss in yen to shrink. When we came back from
Maine, we heard the shocking news of a devastating earthquake near my
hometown. Fortunately, when I called my mother, I learned that she and my
sister were safe. The Kobe earthquake was certain to hurt Daiwa, which had
its headquarters only 40 miles away.
In February, another financial scandal rocked the world. A British trader
named Nick Leeson had racked up more than a $1 billion loss by trading
Nikkei stock futures and Japanese bonds from the Singapore office of
Barings Bank. Reportedly, he had fled the country. A few days later, it
became apparent he had wiped out the 230-year-old bank’s capital base and
was about to vanish. Many critics blamed the bank for letting the trader
settle his own trades. Whatever the case, he didn’t have the courage to face
the music when the world learned of his deception. He fled because the
pressure had gotten too intense. Obviously, he hadn’t cared if his actions
destroyed his bank.
Since 1990, Japan had been mired in financial scandals involving banks
and securities firms. In 1991, the largest securities firm, Nomura Securities,
was found to have been covering stock trading losses in its discretionary
corporate accounts by creating fictitious trades while manipulating the price
on certain stocks to enrich the Yakuza (Japanese mobsters). In 1987, the
market capitalization of Nomura was more than twenty times larger than
Merrill Lynch, and its pretax profit was about the total profits of all
securities firms in the U.S. This began a flood of revelations of corporate
improprieties. One of the most bizarre scandals was a personal loan in
excess of $2 billion extended to a restaurant owner/stock speculator by the
IBJ (Industrial Bank of Japan, considered to be a semi-governmental bank)
on fake certificates of deposit issued by an obscure credit union.
Following these scandals, the Nikkei average began falling toward
14,000, the low of 1992, again threatening to wipe out the unrealized profits
on the banks’ stockholdings. Meanwhile, the already steep decline in the
dollar against the yen accelerated once it broke through 100 and neared 80
in July. In terms of the Japanese economy and its financial system, it felt
like the end was near.
Something was telling me that these events were sending a signal that
the time was here and I should begin to make my preparations. I needed to
do the right thing for my own self-esteem, for my sons, and for Akemi, who
had become the most important part of my life.
For the first time in over a decade, I had hope. But the way the events
unfolded, once I worked up my courage and delivered my letter of
confession, shook me to the bone.
 Part 3

September 1995
 Chapter 16

Disclosure
September 23, 1995.
I was under arrest.
The next morning, the Assistant U.S. Attorney, Figel, and FBI Agent,
Stroz, came back to the New Jersey motel where I was being held, resolved
to ask more questions. I told them I couldn’t answer until procuring an
attorney. There I was, confined to a motel room on Sunday without the
phone numbers of my friends.
It was a foregone conclusion that the search for a ‘good’ lawyer would
fail. At any rate, I picked up the Yellow Pages and started to look through
the ‘attorney’ section. The advertisements for criminal lawyers made them
seem like nothing more than ambulance chasers. From watching the OJ
Simpson trial over the past six months, I knew that what I needed was a
good criminal lawyer.
It was time for me to turn to the only source of help available. I asked
Figel, the prosecutor, if he knew a good lawyer. After all, he was a lawyer
himself, so he had to know a slew of excellent ones. I was so desperate that
I didn’t realize how extraordinary and risky it was to ask the prosecutor to
select my defense attorney. Looking somewhat uncomfortable, he gave me
a list of five, saying they were all superb. The only question was this:
Would he dare recommend one who was capable of beating him? I had no
idea, but something told me not to go with any of them.
Meanwhile, Figel seemed restless to begin a case he thought involved a
billion-dollar corporate cover-up. His instinct must have been telling him he
needed to move fast, but the sole witness would not talk until he had an
attorney. Finally, he suggested I retain a public defendant. A public
defendant! It sounded like a sure way to lose. But he said I could always
fire him if I found someone more capable later on, so I told him to get one
for me.
In less than two hours, a tall man with gray hair in his late 50s appeared
at the motel. His name was Len Joy. He reminded me of Jack Nicklaus and
I intuitively liked him. He was the head of the public defender’s office in
lower Manhattan and lived in New Jersey. Figel must have pulled some
strings to get the chief defender out of his Sunday chores.
We went into another room and talked for a while, and Len told me
about the 5K1.1 clause in the United States Sentencing Commission
Guidelines Manual. In 1987, the U.S. Sentencing Commission had changed
the way Federal judges determined the length of incarceration. To prevent
abuses of power and unfair sentences, the Commission gave them
guidelines to follow. With this, they were locked into how much time they
could impose for one’s crime, except for one condition: They were allowed
to depart downward from the prescribed range if the defendant provided
substantial assistance to the government.
This is statute 5K1.1, Substantial Assistance to Authorities: ‘Upon a
motion of the government stating that the defendant has provided
substantial assistance in the investigation or prosecution of another person
who has committed an offense, the court may depart from the guidelines.
The appropriate reduction shall be determined by the court for reasons
stated that may include, but are not limited to, consideration of the
following: The court’s evaluation of the significance and usefulness of the
defendant’s assistance, taking into consideration the government’s
evaluation of the assistance rendered; the truthfulness, completeness, and
reliability of any information or testimony provided by the defendant; the
nature and extent of the defendant’s assistance; any injury suffered, or any
danger or risk of injury to the defendant or his family resulting from his
assistance; and the timeliness of the defendant’s assistance.’
Len suggested I assist the government to receive a more lenient
punishment. He said triumphantly, “Judging from the way they’re treating
you, they need you badly for whatever they are trying to do.
Why not give them what they want and help yourself, too?” If the bank
hadn’t betrayed me, my sense of loyalty would never have let me turn on
them. But, as it was, Len’s suggestion was music to my ears.
With Len’s blessing, Figel and Stroz had me sign a cooperation
agreement, which, in retrospect, was the most one-sided covenant I have
ever seen. The defendant gives up all of his rights. In return, the
government will make a recommendation for a lenient sentence with a
5K1.1 letter, which gives the judge the authority to depart downward from
the sentencing guidelines. If the guidelines call for 5 years, he can hand out
anywhere from zero to four years.
 I was told that the extent to which the judge departs downward would
match the extent of my cooperation. The best example was Sammy
Gravano, who committed 19 murders and received a five-year sentence for
helping the government convict John Gotti. But the key phrase was ‘no
guarantee.’
So I agreed to run with a carrot hanging in front of my face in hopes of
eating it at the end. How big of a bite I got was totally up to the judge. Even
a sign of reluctance to talk would tarnish the quality of the ‘cooperation.’ I
decided to give them everything they wanted to get a superb 5K1.1 letter.
Len looked at the guidelines under ‘fraud’ and said my crime called for a
48–60 months sentence. But with my cooperation, he felt I would not do
any time.
Len left after assuring me it would be all right to tell them whatever
they wanted to know. “At this point you don’t want to hold anything back,”
he said, flashing his caring smile. With my signature on the cooperation
agreement, Figel began firing hundreds of questions at me.
Their focus at this point was not on how I had amassed the $1 billion
loss with no one noticing, but on how the bank had tried to conceal it once
they knew. I had no complaint because I was being treated, not as a
criminal, but more like a witness. After all, they were at the mercy of my
willingness to supply key facts. Although I had agreed to provide all
relevant information, they had no way of judging if I was being completely
forthright. The only method Figel deployed was to stare directly into my
eyes for any signs of intentional withholding.
That evening, I was allowed to call Akemi for a few minutes. All I
could tell her was not to worry and everything would be all right. She was
calm and didn’t ask any questions. What a woman! The strength of her
character kept me from a breakdown.
Figel and Stroz left in a hurry with several FBI agents. I later learned
they raided Daiwa’s NY branch that very evening and confiscated nearly
100 boxes of documents.
A different set of agents guarded me that night, but I quickly got used to
the arrangement. They seemed relaxed and let me join them as they played
cards. The next morning, they told me they were going to move me to a
hotel in Manhattan. The current location was too far from the city for the
busy prosecutor and investigator. A young agent named Mike, well-built
and friendly, put the handcuffs on me, saying, “We have to do this during
transportation.”
“I understand,” I said nonchalantly, but I was ticked off. By now they
should have known I was not going to run.
We drove through the Lincoln Tunnel in an old Buick. It was different
driving down this familiar highway with handcuffs on. This was not the
first time I was going into New York unwillingly (I had commuted to the
city for more than 20 years), but this time everything felt different. I was on
the other side of the law. I was inside a barrier, as if there was an imaginary
glass wall between me and the people on the street that kept me from
speaking to them. New York City was no longer part of my world.
We arrived at the Shelbourn Hotel on Lexington Avenue between 37th
and 38th. The agent couldn’t find a parking space and had to drive around.
“You don’t mean the police would ticket a car with an FBI decal on it?” I
asked.
“All the time,” he answered. “We’d bust them if they broke our laws,
and they treat us the same way.”
When we got out a block away, he put a sweater over my hands to
conceal the cuffs. A few people stood by the entrance, but no one noticed
the handcuffs. In the narrow lobby, the agent asked for the key to my room,
which had been reserved earlier. I heard them talking about the difficulty
they had in obtaining a room due to the upcoming visit by the Pope.
Unaware of who we were, the clerk handed over the key.
The room was not as modern and clean as the one in Embassy Suites,
but it had the coziness of a two-star hotel. I knew I would be guarded by
FBI agents around the clock. Because there were only three or four from the
securities fraud area assigned to my case, the FBI had to scrape up six from
other units to cover three shifts a day. Most were in their 20s and 30s and
didn’t mind the boring job of babysitting me. Contrary to my TV-fed
impression, these men were very low-key and easy to get along with.
For my dietary needs and toiletries, the FBI furnished an envelope full
of singles. I felt I could eat anything within reason, but I wasn’t audacious
enough to ask for a $30 plate of sushi when the agents settled for Whoppers
and Big Macs. Junior agents preferred to go out to pick up my food, but
older and bolder agents accompanied me to pizza shops and restaurants
without handcuffs. At times, they were so relaxed and friendly that I forgot
I was in their custody.
 The next morning, after introducing myself to the new set of agents, I
turned on the TV and two females came in at 6:00 a.m. while I was still in
bed. CNBC had a pre-market segment with Sue Herera. After her corporate
reports she said, “Japan’s Daiwa Bank discovered a $1.1 billion trading loss
at its New York branch.” She said the trader responsible was named Toe-
she-hyde Egooche. Jesus! What the hell had happened? As far as I knew,
the bank was not going to announce this until October. They showed a
picture of the bank’s president bowing in apology in front of a clutter of
microphones. Suddenly I couldn’t breathe. This was it. The secret I had
kept for twelve years was out in the open. Now the whole world knew!
A few hours later, Mike came in and told me to get ready to go to the
Federal court for arraignment.
“What am I supposed to do there, Mike?” I needed to know.
“They will probably ask if you intend to seek bail.”
“That would be nice. Do you think they would grant it?”
“Why not? Everybody gets bail, especially for a white collar crime.”
I prepared myself for a court appearance and left with cuffs on. As the
car approached a tall building on Pearl Street, Mike told another agent who
was driving to go around to the back because a mob of reporters was at the
courthouse entrance. We drove by a crowd of Japanese reporters with huge
cameras on their shoulders. The car passed through a gate into the basement
parking area, and the agents moved me through narrow corridors to the
courtroom.
Len was already there. He told me I didn’t have to say anything. He
explained we were going to waive my right to ask for bail because the
government needed me close-by for their investigation of the bank.
I agreed; not because I thought it was the right thing to do but because
Len advised me so.
The courtroom was filled with spectators, mostly media people. I hadn’t
expected to be the center of attention, but all eyes were on me, including
three sketch artists. To the Judge’s question “How does the defendant
plead?” Len responded, “The defendant pleads not guilty, your honor” in
his husky voice. There was a sign of disbelief in the Judge’s voice as he
asked if I was waiving my right to ask for bail. Len assured him I was. The
entire proceeding lasted no more than 15 minutes.
Because of the CNBC news, Akemi received several phone calls asking
what was going on, including one from my mother. At this point, I had not
been able to fill her in, so she was in the awkward position of having to
wing it. She asked my mother to fax her copies of the reports appearing in
the Japanese papers. Even though much of this was confusing, she added up
the clues and created a fairly accurate picture. But the attention my case
was garnering made it tough on her at work because everyone wanted to
query her about it. Her boss showed her a newspaper picture of me pleading
not guilty before the judge and read her the accompanying article. It was so
unexpected that she broke down in tears.
Len dropped by later and showed me an article on the Daiwa press
conference from a Japanese paper, which had been faxed to him.
After reading it, I was able to put together the story behind the scenes. It
had begun in early September with the conflict between the domestic and
International Divisions heating up. The domestic division insisted on
disclosing the incident, while the International Division refused because it
feared creating a full-fledged scandal. Unaware of the risks, the domestic
division was happy to hand over the International Division to the authorities
and let them take responsibility. To them, the ratio of reward to risk was 99
to 1. Unfortunately, they didn’t have enough information to measure it
properly.
Because the MOF was not stepping in with both feet to assist Daiwa,
the tide was turning against the International Division. Yasui was caught
between a rock and a hard place; in order to get the MOF to realize the
seriousness of the situation, he would have to divulge Daiwa’s past
improprieties. It was Yasui vs. Kaiho. Kaiho saw very little risk for himself
in disclosing the loss. In fact, Fujita, the CEO, and Yasui would be forced to
resign, and Kaiho would become the next CEO.
Without an endorsement from the MOF, the pressure mounted from the
domestic faction for early disclosure. In desperation, Yasui agreed to
consult with an American law firm, Debevoise & Plimpton, anonymously
through a Japanese law firm. Their advice was to report it immediately.
Yasui sent Yamaji to New York again. On September 5th, Tsuda and Yamaji
went to see Art Thies at Sullivan & Cromwell. Well aware of the
seriousness from having handled our 1993 case, he advised them to report
the current crisis to the Federal Reserve Bank of NY immediately.
At this point, Yasui made another critical error. The lawyer at Sullivan
Cromwell knew how Daiwa had lied earlier about where the trading
operation was conducted in the 1992 examination and had admitted this in
the 1993 exam. But he didn’t know that Daiwa had lied to the Fed again
about leaving me in charge of its trading operation. No one but Yasui and I
knew exactly how deep the deception ran. Although it was detailed in my
letter, those who made critical decisions were not shown it, and they made
their evaluations from only what Yasui wanted them to know.
With the recommendation from Sullivan & Cromwell, on September 7,
Daiwa held a directors’ meeting and voted to report the incident to the Fed.
On September 12, Daiwa officially reported the unauthorized trading and
the resulting loss to both the MOF and the Bank of Japan.
Despite the ongoing financial crisis in Japan, the MOF had to let Daiwa
report the incident to the Fed following the strong suggestion by a well-
respected American law firm.
For the first time in Japanese society, which was built on a long history
of tradition and customs, it clashed with American society, which was built
on laws. Being above the law, unofficially, the MOF had total control of its
fate in Japan, but its powerful influence was not recognized elsewhere. In
an effort to reform Japan into a free, democratic, and capitalistic society, the
occupiers had given too much power to the bureaucrats in charge of
economic policy.
Unlike the United States, Japan had a homogenous race that had
inhabited the small island for over 2,000 years and didn’t need finely-
prescribed laws to maintain a conflict-free society. There were tacit rules
that people followed without questioning.
Nevertheless, following WWII, General MacArthur instructed his
Japanese counterparts to draw up a new constitution for Japan. In a speech
to Congress, he gave the following message: “Since the war, the Japanese
people have undergone the greatest reformation recorded in modern history.
With a commendable will, an eagerness to learn, and a marked capacity
to understand, they have erected an edifice dedicated to the primacy of
individual liberty and personal dignity from the ashes left in the war’s
wake. In the ensuing process, they have created a truly representative
government committed to the advancement of political morality, freedom of
economic enterprise, and social justice. Politically, economically, and
socially, Japan is now the equal of any free nation on the earth and will not
again fail the universal trust.”
Though a new constitution was enacted in 1947, the development of the
judicial arm was neglected, due in part to the existence of traditional ethics.
This was helpful to the MOF, which needed total control and complete
flexibility in implementing effective economic policy. Their arbitrary
changes of rules and inconsistent and self-serving disclosure policy were
accepted as a necessary evil in creating a world economic power. It was
ironic that General MacArthur destroyed the military bureaucrats but
instead created economic bureaucrats in the name of promoting democratic
capitalism in Japan.
Because General MacArthur had not promoted a strong judicial system
after the war, the MOF was blindsided. They didn’t know much about
foreign judicial systems. As long as the business remained in Japan,
everything was fine. In fact, the MOF was the law. To assure its economic
prowess in the world, the MOF was given the power to override the justice
system as it deems necessary. (Ironically, in recent years, a similar
justification has been applied to financial institutions in the U.S., namely,
the ’too-big-to-fail’ argument.) However, the incident occurred outside of
Japan. Unfortunately, the super-elite bureaucrats in the Japanese
government and the Japanese bank directors didn’t realize that the
American justice system didn’t give a damn about the systemic risk of the
Japanese financial system.
Under the MOF’s reluctant instruction, Yasui met with the First Vice
President of the Federal Reserve Bank of New York, Ernest T. Patrikis, and
reported the incident to the Fed on September 18, using a ‘criminal referral
form’ that named me as the perpetrator.
At the same time, the head of the MOF and Bank of Japan called
Patrikis personally to request a special consideration and to delay the
disclosure, given the Japanese financial crisis. Patrikis was not informed
about any of the past regulatory misconducts by Daiwa.
So being a lawyer himself and not realizing Daiwa’s complicity, Patrikis
advised Yasui to inform me of their action so that I could obtain my own
counsel. However, for fear of premature disclosure, Daiwa elected not to
follow the advice.
Another blunder was made here. That is, it is not hard to imagine the
MOF official telling Patrikis that they had been informed of this incident
only a few days before, when in fact, they were informed forty days before
and tacitly instructed Daiwa not to disclose it.
Two days later, on September 20, the NY the Fed contacted the U.S.
Attorney’s office in the Southern District of New York and reported the
incident. The FBI was also notified, and subsequently met with the bank’s
management, at which time they learned of the existence of my 30-page
confession letter. When the bank was ordered to submit a copy on the 21st,
despite a number of incriminating facts mentioned in it, the Daiwa’s Tokyo
office had no choice but to send it.
Tragically, Daiwa consulted Sullivan & Cromwell who was not
specialized in criminal law. Had they consulted a criminal attorney with the
complete details of their previous violations, they could have certainly
protected the bank better. For starters, a well-informed criminal attorney
would have made sure that the author of the confession letter didn’t fall into
the hands of the prosecutor.
The next morning, the news of my arrest was on all the front pages.
Most of the descriptions of the situation were accurate, although they had to
use my senior college picture because they couldn’t find a current one. I
was infuriated when the Star-Ledger of New Jersey called my son at his
college and interviewed him without warning.
The difference in newspaper coverage between the United States and
Japan was interesting. The U.S. media tried to shine a spotlight on my
personal side, reporting on such matters as the college I had attended, my
family life in New Jersey, my kids, and so on. In Japan, the media was
concerned with my position at the bank, how I was able to single-handedly
cause so much damage, and what sort of preventive measures had been in
place. The cultural difference was striking. In the U.S., I was an individual
named Toshihide Iguchi, but in Japan, I was only an ’employee of Daiwa
Bank.’
The Japanese papers contained comments the senior managers had
made at the press conference. Fujita, the CEO, said, “We trusted him with
everything, but he betrayed us.” The bank had given me the key to a vault
holding $6 billion worth of securities without creating any safeguards. That
was a lot of trust. Another said, “His scheme was too intricate for the most
modern internal control system to catch.” Actually, their internal control
system simply lacked the most basic function of checks and balances. “He
was a locally-hired employee,” another said, as if they were saying, ‘Our
proper employees would never do such a thing. It could only be done by a
second-rate, locally-hired employee.’ They were lucky this didn’t get
picked up by the American media.
 The bank, though, had made yet another crucial mistake that was sure to
haunt them later. Fujita said, “I received a confession letter from Iguchi on
July 21. Then we spent two months verifying the loss. When we were
certain of the amount, we reported the incident to the MOF on September
18th.” When I read this, I couldn’t believe their naiveté. Didn’t they realize
that when they betrayed me, I would tell the U.S. government about their
meeting with the MOF on August 8, their plot to conceal the loss, the
MOF’s instruction to delay the disclosure, and their making me continue
working to verify the loss? Or did they think I would still maintain my
loyalty to the bank and keep my mouth shut?
After making these weak excuses, the CEO said humbly, “To take
responsibility for this inadvertent loss, all members of the senior
management will take a 30% reduction in their winter bonus.” When I
heard this, my jaw dropped. What blissful ignorance! These super-elite
bankers who managed several hundred billion dollars of assets were
actually thinking that not only could they keep their job but also preserve
70% of their winter bonus.
Figel had been dropping in at the hotel room to pick my brain every
now and then. But my concern was Akemi. I regretted not having told her
the truth sooner. When I decided to confess, I was ready to face the music,
which meant disappointing my friends and loved ones. Without them, life
was not worth living. For this reason, I could not muster the courage to be
truthful for twelve years, but when Akemi came into my life, everything
changed. She gave me the desire and strength to shed the cloak of deception
and begin the work of rebuilding my life.
Ironically, as I became strong enough to tell the world what I had done,
I found myself petrified by the thought of losing her. Once we’d become
close, I didn’t think I could bear the pain of being alone again. Although I
had no idea how she’d react when she learned the truth, I was afraid to take
the chance. What I conveniently ignored was that ultimately, she would face
the same judgment call as all my other friends and have to make her own
decision, regardless of what I wanted or hoped. The only saving grace was
that she knew the true make-up of my character, not what I had done in
desperation. I had been completely truthful to her about everything except
this, and I hoped that would outweigh the setback I was now about to go
through. If she decided to leave me in disgust, I had no idea how I’d react.
My plan to rebuild my life with honesty and truth was based on her being
there with me, hand in hand. There was no doubt in my mind that I loved
her. I knew it was not infatuation; it was not dependence; it was not self-
sacrifice. She was not an emotional crutch. She made me see there was
hope. It had to be her and no one else. But the question was, ‘Would she be
there when she learned the truth?’ I needed to talk to her, badly.
Because I had not explained everything, her anguish was mounting.
Luckily, she had a friend at work, Mieko, who invited her to her home,
asked her to stay over, and together with her husband encouraged her not to
react until she knew the whole story; not just what was in the news. But that
evening she phoned my mother, who was crying because the Japanese
papers predicted I would be sentenced to ninety years. That made it even
tougher on Akemi, but somehow she held up until I phoned her the
following day.
I reached her before noon at her job, apologized for not having told her
everything, and asked if she would come to the hotel where I was being
held the following evening. I promised to tell her the entire story. She
agreed and was picked up by a female agent known as ‘Wonder Woman’.
She supposedly flew airplanes, had mastered martial arts, was studying for
a law degree, and had a number of other qualifications. Plus, she was
gorgeous.
‘Wonder Woman’ brought Akemi in at around 8 p.m. It had been five
days since I had seen her, but it felt like months. She looked tired but very
happy to see me. We hugged for a few minutes and then sat at a dining
table. After an obligatory search of the bag she had brought me, the agents
said we could talk in the bedroom. Any visitation was supposed to be done
in front of them, and we were to talk in English, but they didn’t think it was
necessary. We thanked them and went into the bedroom.
“I am so glad to see you,” I said, hugging her again. “Are you holding
up all right?”
“I am fine, but is that story true? You really lost a billion dollars?” Her
eyes begged me to say no.
“Unfortunately it is…. I am so sorry I wasn’t able to tell you. It was
such a serious matter that I didn’t think it was fair to tell you and then
expect you to keep it to yourself.”
“But did you know it would end like this?”
“No, in all honesty, I didn’t expect it to come to this. This was my worst
scenario.”
 “What’s going to happen from here on? Your mother was worried to
death…she saw in the Japanese paper that if you’re convicted you may
spend your life behind bars.” What a woman! She was more concerned
about my mother than herself.
“That’s utter nonsense. Len doesn’t think I’ll get much time because I’m
cooperating with the government. They are trying to prosecute the bank.”
“I’m glad to hear that. But when do you find out for sure?”
“Well, that’s the thing. I won’t get sentenced until the bank’s case is
closed, which means it could be a couple of years if it goes to trial. And it
looks like I’ll have to stay in custody, unless I get bail.”
“Can you get it?”
“Not at this point. They think the bank will try to persuade me not to
cooperate.”
“So they are keeping you out of reach of the bank?” Her eyes narrowed.
“Exactly. Knowing about the skeletons in Daiwa’s closet puts me in a
position where I could create a very serious problem for them.”
“Do you think a different lawyer could do a better job?”
“It’s possible. I’m not really sure about these public defenders. Len is a
great guy, but, after all, he works for the government. And just from my
business sense, I can’t see him working extra hard when he only gets a
fixed salary from them.”
“Do you want me to look for another lawyer? I could ask around.”
“That wouldn’t hurt anything. The only problem is that I don’t have
much money, only about twenty thousand dollars.”
“I know.” She had been paying our bills and balancing our account for
the last six months, so she knew exactly how much was in the bank. I
regretted not having saved more.
“I have some money, maybe $15,000.” She was willing to use her
meager savings for me.
“Forget about that. The reason I wanted you to come is not to talk about
money. First, I want to apologize for not being truthful. Second, I want you
to know that I decided to end this one way or another in order to salvage a
chance to spend the rest of my life with you. Third, because it’s turning out
to be worse than I expected, I want you to go back to Japan and take some
time to think about what you want to do with your life.”
“You need me here. What about the house?”
 “No, forget everything. All I want you to think about is yourself. You
need to detach yourself from all this and decide if you still want to be
associated with me, because, after all, I will be a convicted felon. Although
you know I am a good, decent person, society will not look at me that way.
Could you live as the wife of a felon? It is a tough decision, and I am truly
sorry for putting you in this spot.”
“I know you are a wonderful person, Tosh. I don’t care what other
people say.” She said this firmly, staring right into my eyes.
“You have no idea how happy I am to hear that. But, still, give yourself
a chance to evaluate the whole situation. I feel you can do it better in
Japan.”
“I’ll think about it,” she said.
It was past midnight. She would be worn out the next day because it
would take her over an hour to get home to Kinnelon. She would only get a
few hours sleep before she had to head back to her job in Manhattan.
As we reluctantly came out of the bedroom, ‘Wonder Woman’ offered
to break the rules by letting Akemi stay with me. I couldn’t thank her
enough for her thoughtfulness. We returned to the bedroom, leaving the
door open, as was the rule. However, a few minutes later one of the agents
gently closed it.
I held her close throughout the night, feeling she was a part of me. At
times she would start to shake as some frightening thought entered her
mind, but I would just hold her closer until it passed. In the morning, I
asked her again to go back to Japan. She nodded to acknowledge my
request, but I didn’t think she was really considering it.
The most important clause in the cooperation agreement was the
following: ‘A defendant must be completely truthful about everything.’ If
they find out something was withheld, or lied about, they can nullify the
agreement, even after substantial cooperation is provided.
The reason for this is that if the case goes to trial, the witness’s
credibility could be tarnished. Defense lawyers would do anything to
destroy it. After mounting a great effort to prove a case, the prosecutor does
not want to lose it because a witness gets caught in a lie during cross
examination. Although 80% of the cases end up in a plea bargain, it was not
worth taking the risk. When the cooperation agreement is accepted, a guilty
plea to all the defendant’s crimes must be entered and all his rights given
up. If the government finds any untruthfulness and withdraws the
agreement, the punishment can be severe.
There were two matters I had not written in my confession letter nor
disclosed to the prosecutor. At the onset, I had no intention of mentioning
them. However, the more I thought of Akemi, the more pressed I became.
Most likely neither would be discovered, but I could not take any chances.
The first one I revealed was about Araki and Yagi having engaged in
unauthorized trading that produced sizable losses. I hadn’t wanted to
mention this, but when Araki chose not to tell me what was going on the
day before I was arrested, I lost confidence that he wouldn’t break under
pressure. If he did, and confessed, the prosecutor would pull my plug. I
cursed him for not having told me the truth; I was sure he had known what
the bank was doing behind my back. Even now, he could have sent me a
message through Len, but he remained as silent as the other members of the
group.
After much deliberation, I decided to tell the prosecutor about his and
Yagi’s transgressions. Their only mitigation was that neither had
participated in any operational improprieties, such as selling customers’
securities, sending money out of the bank, or making false entries in the
bank’s computer. Because they were not familiar with the operation side of
the trading business, I had taken care of that for them.
Another issue I needed to disclose was my transfer of $520,000 to the
futures broker. This was very difficult because I gave my word that I would
never disclose the fact that I opened that account. Now that it became
apparent that the account was part of my impropriety, they would be in a
heap of trouble. So, either way, I was going to keep them out of the picture
by claiming that I simply embezzled the money for my own use. I confided
this to Len without mentioning anything about the futures account, and he
said it was up to me whether or not to disclose it. He told me that since the
account was in my father’s name, what I did with the money would not be
an issue. However, if I admitted to embezzlement, though a negligible
portion of the loss, it would cast a negative light on my character. “Tosh, I
have no problem either way, but if it comes out later, you will lose your
5K1.1, and the consequences will be devastating,” he advised. I asked for a
day to think it through.
As I deliberated, I saw how the new revelation would hurt those who
still loved me, like Akemi and my mother. The tone of the newspaper
articles indicated there were some sympathizers to my predicament, but
they would be disgusted with me and brand me as a common criminal with
no mitigating factors. All my efforts to salvage my humanity in the eyes of
my loved ones would be in jeopardy. By the same token, if it were to come
out later, involuntarily, it would destroy any chance I had to rebuild my life.
What made the decision so difficult was that the possibility of anyone
discovering it was extremely small; like finding a needle in a haystack.
Ultimately, I thought about Akemi, my sons, and my mother. If they
knew my true character, which I was certain they did, they would not judge
me by this. However, if I were not to reveal it now, I would be taking a
chance, however small, to destroy all of us. I decided to shed the last of my
lies and not hold anything back.
Len was happy I made this decision, because he felt that legal
retribution could be more damaging than moral retribution. When Figel
came to the hotel, Len brought it up. After listening, Figel said, “At the end
of the day, he will have nothing,” meaning I would have to agree to forfeit
all my assets. The law does not allow for distinguishing which asset has
been acquired with embezzled money, which would be close to impossible.
They simply take everything.
Every day I met six new FBI agents. They knew nothing about my case;
nor were they interested. In fact, I was more curious about them and asked
countless questions. Because the agents who worked for Stroz were busy
investigating the bank, new ones were asked to fill in. Generally, a young
agent was more nervous about what I did than the older ones. One night, I
called my mother in Japan by using a calling card. The agent heard me
speaking Japanese and ordered me to speak English. I told him my mother
didn’t speak English. He said he was going to put the call through the FBI
phone system so it would be recorded.
“Are you kidding?” I replied. “Even if they record it, they won’t know
what I am saying. If you’re worried I’m talking to someone I shouldn’t be,
tell me to hang up the phone. I will tell my lawyer the FBI forbids me from
speaking to my own mother about making arrangements to pay him.”
“Oh, no…I don’t mind if you speak to your mother; it’s only that I need
to know what you are saying,” he still insisted.
“Look, I am making this call in front of you. If you don’t understand
what I am saying, that’s your problem. Get yourself an interpreter.” Instead
of calling his boss, he told me to make it short.
 “Mom, I am really sorry I’m putting you through this,” I said. “But
don’t worry about me. I’m doing great. Soon there will be more revelations
about the bank’s wrongdoing.”
She broke down in tears so fast I could barely hear her saying, “I…I
will…do anything…. I wish I could take your place….”
“Mom, believe me. It’s not nearly as bad as they say. Just don’t believe
what you see in the paper. Please.”
“They said….you will be sent to prison for….”
“Forget that, Mom. Look, I want you to know one thing. I have not been
this happy in twelve years. I’ve been tormented with this secret for so long,
I hadn’t felt one moment of happiness. Now, although I am incarcerated, I
feel relieved to be free of that worry. So you don’t need to feel bad for me.
Okay?”
“Yes…but….”
“Mom, I have to go. Promise me you won’t feel bad for me. I’ll talk to
you again. I’ll call you when I can.”
“Okay. Please take care of yourself….” Hearing my mother cry, I
couldn’t hold back my own tears. I always hated to see her cry. Whenever I
did something wrong as a kid, instead of spanking me, she would cry,
which was worse than any punishment. Since I left Japan when I was 18,
I’d been able to see her once every three to four years. She regretted
sending me to the United States to study because I ended up staying
permanently.
Aside from a few minor irritations, the agents were decent. One night, I
went out with two older agents who jokingly said, “Just don’t run, okay?”
We went to a pizza parlor like any other diners. Then we took a stroll on
Lexington Avenue. They had a carefree attitude and showed no concern
about my being seen by anyone. According to some newspaper articles, I
was being held in an undisclosed location, and reporters were using metal
detectors to discover my whereabouts. Here I was, strolling down the street
without any disguise. Back in the room, we watched the World Series and
played cards. But despite our laughter, my heart ached from thinking about
Akemi being frightened and alone.
The more I thought about it, the more sense it made to hire my own
attorney. Len had spent much of his time coming to see me and talking to
the reporters. What I didn’t realize was that even though he was not paid by
me on an hourly basis, he could spend as much time as he thought was
necessary. Instead, I thought that by being on the government payroll, he
lacked the incentive to work extra hard for me.
The problem was that I had no one to consult on this issue. Being
locked up in ‘an undisclosed location’ was not very convenient. So I
discussed my concerns with him. It was a bit awkward, but I asked him if I
should hire a different attorney. He responded graciously, “Tosh, it’s your
life. I know I’ll do as good of a job as any other attorney, but if you’d feel
more comfortable with someone else, I have no problem with that. I would
like to represent you, but ultimately you have to make the decision on your
own because only you will bear the consequences. I can’t and won’t say
anything to influence your thinking. The only thing you should know is that
no matter who pays an attorney, the government or the client, he works only
on the behalf of his client. That is a basic rule no lawyer would
compromise.”
Although I appreciated his candor and integrity, I wished he had sold
himself to me more strongly by telling me he was the best there was. After
a day, I decided to get another lawyer at $150 per hour, one who used to be
an Assistant U.S. Attorney. This was a decision I would regret for the rest
of my life.
On October 3, 1995, the Federal Reserve Bank and the NY State
Banking Department jointly issued a cease-and-desist order to Daiwa Bank.
The regulators ordered Daiwa to wind down nearly all trading activities for
its own account in its New York branch and to make daily reports on its
positions to the Federal Reserve. Daiwa was also banned from entering new
lines of business. This order was to be reviewed after the hearing in
Washington D.C. on December 27.
I had finally convinced Akemi to go back to Japan. She was given a
leave of absence from her job because she had said there was a death in her
family. She would leave in three days. When Stroz arrived with Figel, I
asked if I could see her again. Stroz said, “Let me see what I can do.”
Although he hadn’t been coming as often, I sensed he controlled what I
could and couldn’t do. And he seemed to be a very decent person.
An agent named Mike Mahoney called her the next day to say she could
see me the following evening. When she arrived, Mike and a female agent
suggested we all go to an Italian restaurant for dinner. Walking hand in
hand, it was as if we were two couples out for a night on the town. I was
nervous because my picture had been in the papers a lot—until Akemi
reminded me it was twenty-three years out of date. Afterward, Mike
suggested we go for a stroll. The agents positioned themselves about twenty
feet behind so we could talk in private. Akemi brought up how nervous I
had been when my sister and mother had come. “In my mind, everything
was built on deception,” I admitted. “I woke up so many mornings hoping
everything would somehow be fine. But it only took a few seconds to
realize I was living a hollow parody of life.”
“Well, finally there’s no more deception,” she said. “Do you still love
me?”
“Of course, there was no deception in my feelings for you. But right
now, all I want is for you to do what’s right for you, not anyone else, but
you.”
“I know…I will. But are you going to be all right without me?”
I told her I would be fine, because as it was, I worried about her all the
time. I knew this was for the best, but the fact of the matter was that I was
scared to death that I would never see her again.
After an hour’s walk, we arrived back at the hotel. “Do you really love
me?” she asked.
“I do,” I confirmed. “And I know it’s so, because you gave me my life.
If you hadn’t entered it, I think I would have done something destructive to
myself. You are the sole reason I decided to grab this second chance and do
whatever it takes. I believe any pain or hardship now is worth enduring if it
leads me to a new life with you.”
“What if I don’t come back to you?”
“I will find you and make you an offer you can’t refuse,” meaning, I’d
do anything to win her over.
“When?”
“I wish I knew. Hopefully not in the too distant future.”
She looked up at the sky. The stars were visible but seemed so far away.
I knew she wanted to talk until tomorrow morning, but Mike was ready to
take her back. She thanked him for his consideration.
Mike pointed to the next corner, saying, “We’ll wait over there. Take
your time.” We hugged, kissed, and parted. Her final words were, “Good-
bye, my love.” If I had only one wish for the rest of my life, it would be that
this wasn’t a final goodbye.
 Chapter 17

Locked Up
On October 9, 1995, Daiwa Bank held a press conference in Osaka.
Firstly, it disclosed the cover-up of the $100 million loss that had
accrued through unauthorized trading by Daiwa Trust in 1987. It explained
that the top management had noticed the incident mentioned in the Iguchi
letter and conducted a full investigation, discovering the impropriety that
had been committed by some members of senior management.
Daiwa then announced the resignations of Fujita, the CEO, Yasui, the
Deputy CEO, and Yamaji, the Senior Managing Director, who took
responsibility for the $1.1 billion loss and the Daiwa Trust cover-up. Kaiho
was appointed the new CEO, as he had envisioned. He apologized for the
poor management by his predecessor and promised he and his team would
establish more stringent internal controls and strengthen their oversight to
build a better and healthier Daiwa.
For the time being, he seemed to have calmed the critics, but Figel
showed no compassion. In Japan, a resignation from one’s post is a severe
enough punishment for any corporate impropriety. The rationale behind this
seemingly lenient treatment of corporate crime is that it is the individual
members of a corporation who commit the crime and not the corporation
itself. A corporation is not capable of committing a crime, for it is nothing
more than a legal entity.
Although a corporation can be sued for damages if it profited from a
crime committed by its members, it cannot be held responsible for a crime
itself. If the government were to prosecute a corporation and the court were
to order dissolution, it would victimize many innocent shareholders and
employees. In fact, if an officer of a corporation commits a crime for
whatever reason, he is failing to perform his fiduciary obligation to the
shareholders and employees, who are, therefore, the victims of his
irresponsible act.
A case in point involves the Arthur Andersen accounting firm, which
was indicted by the U.S. Justice Department for shredding documents
relevant to the investigation of Enron. It was not Andersen, the organization
with its 25,000+ employees, but a handful of officers who committed the
crime.
Despite a loud plea by its employees, the U.S. Justice Department
refused to release its legal grip on the organization and, as a result, through
the loss of clientele and credibility, Andersen was forced to dissolve itself.
The U.S. Justice Department contended that Andersen’s employees were
the victims of a handful of its unethical officers. Or were they? Couldn’t the
Justice Department have prosecuted only those officers and leave Andersen
with a fresh team of more ethical executives?
Figel didn’t give a damn about the complete removal of the senior
management team, including the CEO, who were the culprits of Daiwa’s
alleged crime.
He didn’t give a damn about the shareholders, who had already suffered
a $1.1 billion loss and terrible publicity. He knew that the bank had gained
nothing from concealing the loss. Besides, it was simply following the
direction of the MOF to delay the announcement due to a serious systemic
concern that existed in Japan at that time. He didn’t care if Daiwa was
brought down as a result of an astronomical fine imposed by the justice
system or if the Japanese financial system collapsed, as long as he got a pat
on the back for filling the government’s coffers.
It had been sixteen days since I was arrested. Stroz told me the FBI
could not afford to have two agents guarding me around the clock. I was
afraid of the alternative because I didn’t want to hear the word ‘jail.’ I told
my new lawyer, Vince Briccetti, that I didn’t want to be jailed. To me, jail
was a very scary place, where men got raped.
Seeing how unhappy I was about the situation, one of the FBI agents
suggested a WITSEC (Witness Security Program) and I agreed to go, as
long it was not jail.
On October 11, I packed my bag and left with Stroz in a station wagon.
For security reasons, all the windows were covered with black velvet
curtains. In fifteen minutes or so, we pulled into a sally port at the
courthouse next to the U.S. Attorney’s office, a loading area or a large
garage. Inside was a room with several monitors.
As we entered, one of the court marshals came out and greeted Stroz.
Stroz said he would send an agent back later and left me with two marshals,
who were not exactly friendly. There was a steel gate, and another steel
door was inside. As the marshal opened the door, I was greeted by the
hissing sound of ventilation and a strong disinfectant odor. The room was
pitch dark until the marshal flipped a switch. There was a small bed and a
desk, but no windows. It had a tiny bathroom with no door. At the front
corner, I saw a surveillance camera covering the room. “Okay,” I thought.
“That’s the deal.” I would be under constant surveillance. Behind a steel
door and a steel gate, I felt trapped and broke out in a sweat. I wasn’t
claustrophobic, but I felt like I was going crazy.
To maintain my sanity, I started reading a book Akemi had brought me.
A voice from a hidden speaker asked, “Hey, you want lunch?” I replied,
“Yes,” looking at the camera and assuming someone was looking at me.
“What do you want? Burger King okay?” “Yeah, thanks.” Ten minutes later,
a marshal brought me lunch. Afterward, as I was lying down with my eyes
shut, the voice said, “The agent is here, get ready.”
A young agent who worked with Stroz handcuffed me and took me
through a maze to the U.S. Attorney’s office. To the left of the elevator,
there was a thick glass door controlled by a switch at the receptionist’s
desk. The sign read ‘Securities and Commodity Fraud Unit.’ This was
where Figel had his office. There was no one at the desk, so the agent used
the phone on the wall to request the door be opened. As we waited, two
men came in from the other side of the elevator hall. One was dressed in
blue prison garb, with his hands cuffed at the back, while the other held the
attached chain. The prisoner looked at me, as if to say, “What’s your story,
man?” My hands were also handcuffed, but in front.
A woman appeared at the desk, and we went in. We passed through a
hallway cluttered with file cabinets, a copy machine, and boxes of
documents, and into a room with a giant desk and boxes containing the
material for Kidder Peabody’s trader, Joe Jett. We had been on the opposite
sides of several trades, and now we were together in purgatory.
Figel’s office was on the right; the investigator’s room was on the other
side, facing the front of the building. After a while, Figel showed up, and
we began another session. He wanted to know what the bank had done after
receiving my letter.
Though at an early stage Yasui and Yamaji considered the possibility of
burying the whole thing, it was more of a fantasy than a real possibility.
However, fantasy or not, to a prosecutor it was a conspiracy that could get
the offense level jacked up and produce more fines. Conspiracy can be as
bad as the actual implementation of a plan—or worse. At this point Daiwa
was a little mouse within the striking distance of a hungry python.
When we were done, I was returned to the WITSEC room and locked
in. Unlike the FBI agents, the marshals were not personable at all. The only
time they talked to me was when one of them asked what I wanted for
dinner. It wasn’t that I yearned to talk to them, but it felt strange to know
they were watching every move I made and not speaking; their robotic
behavior enhanced the unreal aura suffusing me. When I was ready to go to
sleep, I turned off the light. The room became completely black. All I could
see was a tiny red light by the camera in the corner. I wondered if it had
infrared capability.
I was ready to go back to the U.S. Attorney’s office the next morning,
but no one showed up until 2:00 p.m. The marshal had no idea when an
agent was scheduled to arrive. He was basically a zookeeper. He didn’t care
who I was or what crime I had committed. When I went back to the U.S.
Attorney’s office, Vince was there. He had called them to find out what
time I was coming.
We met in a separate room. My concern was simply how much time I
would have to do when it was all over. I’d looked into several cases in
which a defendant cooperated with the government and received a reduced
sentence. One high-profile case was the insider trading scandal at Drexel
Burnham. The junk-bond king, Mike Milken, received a ten-year sentence,
but spent less than two years in a camp. All Vince could tell me was the
judge would determine my sentence, and no one could read a judge’s mind.
What a great lawyer. As far as he was concerned, I was a finished case.
When a defendant is at the mercy of the U.S. Attorney and the judge, all the
lawyer can do is remind his client that he has to give everything he’s got in
order to assist the government.
I began to get used to the WITSEC. The marshals softened up a little.
When I pulled out a pack of cigarettes and found it empty, one said through
the speaker, “We’ll get you one when we get your dinner.” Even though I
wasn’t thrilled about being observed all the time, I thanked him.
October 13 was a Friday. I was not superstitious, but it had not been a
good date for me over the years. Sure enough, Figel told me they couldn’t
keep me at the WITSEC any longer and I would have to go to the
Metropolitan Correctional Center, a federal jail. Since my arrest, I had been
under the custody of the FBI for nineteen days and under the custody of
U.S. Marshals for two days, but the time had come to face reality. I didn’t
have any idea what it was like, but a couple of agents had said it was
terrible. My stomach began to churn.
Stroz came and escorted me to the MCC. He said, “I wish we could
continue to keep you, but assigning two agents around the clock isn’t
possible any longer. I’m sorry.” I told him I understood and appreciated his
consideration. By this time, I sensed all the thoughtful accommodations the
FBI agents extended to me so far was coming from the direction of Stroz.
We went in from the side door on Pearl Street. A guard told Stroz to put his
gun in a box outside the second door. No firearms were permitted past this
point.
We walked through the garage into a large room that looked like a
hospital reception area. There were three men in uniform: gray pants and
white shirts with nametags on their chest. The one in charge, a Hispanic in
his 30s, said, “Okay, what do we have here?” Stroz handed him a sheet of
paper with Mary Jo White’s signature. “A billion dollars!” he yelled. “A
billion-dollar man!” He looked at his associates, who said, “Get the fuck
out of here,” and walked over to see. They kept glancing back and forth,
saying, “You? You don’t look old enough to have grabbed a billion dollars,
man.”
“Well, I’m glad you find that funny,” I said. The guard signed the paper
and gave it back to Stroz as a receipt. Stroz assured me I would be all right,
and he would come back to get me the next day.
After my snide remark dampened their excitement, their attitude
stiffened and I was taken into a room in the back.
“All right, strip down. You want your clothes sent to your house or
thrown away?”
I felt like I was being stripped of the last remnants of civilization.
“Put them in the box over there and come back.” Now he was ordering,
not asking. “All right. Stand up straight. I want you to comb through your
hair with your fingers. Turn your head side to side. Open your mouth and
let me see under your tongue. Okay, now pick up your joint.” My joint! I
didn’t know what that was, but guessed from his gesture. “Okay, turn
around, bend over and spread your cheeks.” Spread my cheeks? What
audacity! What an affront! I was willing to plead guilty to whatever Figel
wanted; he could lock me up for the rest of my life, but not this! I would be
embarrassed to do this in front of me, let alone some idiot like him! Wasn’t
there any room for negotiation? Couldn’t we talk?
I put on a bright orange coverall and was sent into a holding cell. A
heavy metal door slammed shut behind me. It was a large room, twenty by
twenty, with a toilet bowl in a recession. The window had an iron grate, and
the floor was tiled. Wooden benches on two sides were bolted to the
concrete wall and covered with thick paint. I was completely at a loss. Here
I was, in a room with a filthy floor and a disgusting toilet with no seat. I
wondered if this was what the rest of the jail was like, but tried not to worry
because there was nothing I could do.
After an hour, an Asian man in his late 20s was put in the room. He
looked at me and nodded his head. He seemed sensible, so I said, “How are
you doing?”
“Are you Korean?” he asked. He must have assumed I wasn’t Chinese
because I spoke English.
“No, Japanese.”
“Japanese, that’s rare. I’ve never seen any Japanese here.”
“How long have you been here?”
“Oh, I’ve been in the MCC for fourteen months, but in the system for
more than two years. This the first time you got locked up?”
“Yeah, I just came in. What’s it like here?”
“Not bad, but there are some crazy guys upstairs. Like on the 11th
floor.”
“What do you mean—crazy?” I was getting nervous.
“They had a fight tonight between the Chinese and some Puerto Ricans.
A couple of guys got cut up pretty badly.” He said it as if it was no big deal.
“What do you mean? Are they all out of their cells?” Not knowing how
the jail was laid out, I asked him to explain.
“You got the 5th, 7th, 9th and 11th floors. Each one has a north and
south wing. The 5th is for women. Except for 9-South, you double up in a
cell. The door opens at 6 a.m. and closes at 10 p.m. In 9-South the inmates
are locked in 24 hours a day.”
“So, are there many fights?”
“One a month, maybe. You aren’t cooperating with the government, are
you?”
“Yeah, what’s wrong?” I didn’t like the tone he used.
 “Nothing, but don’t tell anyone. If they find out, some may give you a
hard time.” A hard time? What did that mean? My anxiety was going
through the roof.
“Look, just remember, don’t talk about your case when you get up there,
and don’t talk about yourself. Keep your mouth shut and you’ll be all
right.” I wanted to ask more questions, but a guard opened the door and
took him away. He seemed like a good man. I hoped he was on the same
floor as I.
Without a watch, I had no idea what time it was. It seemed I had been
there a long while, but I didn’t mind waiting. After five hours, a guard
finally came in, handcuffed me, and moved me to the 7th floor.
There were two doors on both sides of the elevator hall. The guard used
a walkie-talkie each time we reached a door or a gate. All the doors were
controlled from a remote location. As we walked into 7-South, there was a
small kitchen on the left and another steel gate. A guard inside opened the
gate to a room like a ballroom with a two-story ceiling. Tiers extended like
fingers across the right, center, and left sides. Each finger had two tiers, the
top and the bottom, which were closed in with steel gates. In each tier there
were eight cells: four cells on either side facing each other. In the center of
the ballroom, there were a couple of pool tables and a ping-pong table.
I was put in a cell occupied by a young Chinese man. It was about 10’x
7’ with bunk beds opposite the door. There was a tiny metal table-and-seat
combination and a stainless steel toilet bowl with a sink above. He looked
about twenty-five, and had numerous tattoos on his body. As I came in, he
asked me something in Chinese. I told him I was Japanese. He wasn’t too
happy and neither was I. A Chinese guy with a chip on his shoulder who
didn’t speak English was at the bottom of my list of acceptable cellmates.
The cell was like a teenager’s room with magazines and food scattered
everywhere. There was just enough space to walk to the bunk bed and
climb to the top.
That was my area. Because the ceiling was about 8’ high, there was no
more than 3’ of headroom. All I could do was lie down. He had no intention
of sharing the room with me. He began screaming to his buddies in other
cells, which continued for hours.
How a skinny guy could yell his head off like that was beyond me. But
what bothered me even more was that he didn’t give a damn about me
trying to sleep. During his four-hour, long-distance conversation, he
smoked a whole pack of cigarettes and took a long, noisy dump. Despite the
ventilation system, I could barely breathe. There was no window to open
and no way to get away from this oppression. While lying on the unyielding
mattress, I considered the futility of demanding better accommodation.
The next morning an agent came to get me, and I went back to the
civilized U.S. Attorney’s office. I told Figel to put me in a cell by myself or
I would stop speaking. Surprised, he said, “You aren’t exactly in a five-star
hotel, Tosh.” Angered, I told him I wasn’t bluffing. He shrugged and wrote
a letter requesting a private cell, so I was given ‘total separation’ status,
which meant in no event would I be in contact with any other inmate.
Usually this was given to those who testified against co-defendants. They
were kept in 9-South. That night I was brought there, where all the cells
were 24-hour lock-downs for solitary confinement. Unlike 7-South, there
was no pool or ping-pong tables in the main hall. From a podium in the
center, a lieutenant monitored our movements. I was put into the M-Tier in
the second cell from the front gate. It was the same size as the one I had
been in the night before, but had a small metal bed bolted to the wall
instead of bunks.
The guard at the reception desk, which was called R&D (receiving and
departure), couldn’t believe I wanted to go into a 24-hour lock-down
instead of with the general population. Usually, inmates who got in a fight
were sent to 9-South as punishment. No one understood why I’d rather be
in a hole with privacy than being with a bunch of gangs—most of the young
Chinese and Puerto Ricans were in street gangs.
So finally, I was in my own room with my own bed, my own table to
write on, my own toilet bowl, and my own sink. I was given towels, socks,
a T-shirt, underwear, toothbrush, toothpaste, soap, and my own toilet paper,
a marked improvement. Yet I was confined in a small space and surrounded
by concrete walls and a steel door with a four by twenty inch glass window.
The wall was covered with roaches the size of watermelon seeds, and mice
ran across the floor when the light went out. Nothing bothered me, though,
as long as I had my basic privacy.
The first night, I saw a stocky man walking past my door with handcuffs
attached to a chain around his waist.
“Yo, how’re ya doin’?” he said with a Brooklyn accent. “If you need
anything, lemme know, okay?”
 “Thanks…. Why do you have the chain around your waist, if I may
ask?”
“They’re afraid I might jump on them.” The man said it jokingly and
explained that we were entitled to one hour of recreation in a space about 8’
x 30’ separating the rows of cells. The “rec,” (prison jargon for recreation)
as he called it, was the only time you could be outside your cell and talk to
other defendants on the tier. Everyone walked around to do a ‘stop and
chat.’
The man was Greg Scarpa, Jr. His father, Greg Scarpa Sr., was called
the ‘Grim Reaper’ of the Colombo family. I didn’t know what Junior was in
for. Either he had no hair or he’d shaved his head. He was about my height,
5’7”. Although he looked about 60, I later found out we were the same age.
He was in the last cell on my side. The guy on my immediate left was a
Cuban drug smuggler, and the one on the right, a Palestinian named Ismail,
was the kid who had driven a van loaded with explosives into the basement
of the World Trade Center in 1993. I felt like telling him off because Akemi
had been shopping on the concourse level when the bomb went off. She had
come close to being blown up, and I wanted to know why he had done it.
But I decided not to say anything; our worlds were too far apart. I told him I
had been working in the World Financial Center when the bomb exploded.
“Everything in my office jumped several inches.” He just smiled. He said
he had left the U.S. after that, but the FBI had come to Jordan to arrest him.
As I settled in, I began writing about my life. After forty-five years,
here I was, locked up between an Arab terrorist and a Mafia boss. I asked
myself what had gone wrong and what I could have done differently. Then I
waited, fruitlessly, for an answer.
 Chapter 18

Convicted
Now that they had me, they could go after a much bigger wallet: Daiwa
Bank.
In the meantime, I tried to get used to the routine, which started with a
clang at 6:00 a.m. The 4” x 12” metal flap would hit the steel door when the
guard unlocked the tray slot to insert the breakfast tray. I could either get up
and eat, or ignore it. Half an hour later, he came back, took the tray, and
shut the flap. “Clang!” Then I was left alone until showers started.
Each tier had a shower, shared by eight defendants. The shower room
was 4’ x 6’ and had the same steel door with a tray slot. Once shut, you
could barely move inside. At 8:00 a.m. on Monday, Wednesday, and Friday,
shower hour began with clicks and the call, “Shower!” The guard hit the
metal door with his key and yelled. If I wasn’t ready with my towel, soap
and shampoo, he moved to the next cell. I could just say, “I’m not taking
one today.”
Once I was ready, I would turn face away from the door, lean over, and
put my hands behind me. The guard reached through the tray slot and put a
pair of handcuffs on me. Now he was ready to open my door. The shower
room was alongside the cells by the front grill. The guard unlocked the door
and locked it again after I was in. Then I had to do the same process in
reverse.
If I wanted to shave, I would tell the guard to bring me ‘my’ razor. They
assigned everyone a Bic with their name on it, keeping them on the board
by the control desk.
When I was done, I had to scream out from the tray slot, “L-Tier on the
shower!” The guards might come within five minutes, if I was lucky, or a
half hour later.
Four or five guards were on duty to take care of 48 inmates. After
everybody took a shower, the guards would leave me alone until lunch time.
If it was the cleaning day (once a week), the guard brought a mop and
bucket to the tier and inserted them through the tray slot.
 They also gave me a brush and a bottle of liquid soap to clean my toilet
bowl.
Lunch was much like breakfast, but since everybody was up by then, we
sat by the tray slot and looked at each other, talked, and passed things back
and forth.
‘Rec’ time started in the afternoon. Each defendant was entitled to one
hour in front of his cell. We could walk around, do a stop-and-chat at other
cells, or use the phone attached to the wall by the grill to make collect calls.
I did pull-ups on the gas pipe running across the ceiling.
Dinner began at 5:00 p.m., a happy time in the dungeon. While the
guard was on the tier and in a good mood, we could pass things around. He
was the delivery man, going from one slot to another with milk, oranges,
magazines, and so forth.
After dinner, we got mail, newspapers, and magazines. We could
subscribe to anything we liked. All envelopes were opened for inspection;
sometimes they were careless and cut through the letters inside. The last
time we were disturbed by the guard was when he came around to do his
count at 9:00 p.m.—barring the unexpected.
In mid-October, Figel began urging me to sign the cooperation
agreement and plead guilty so the U.S. Attorney’s office could indict Daiwa
Bank on a conspiracy count. The crimes I was charged with were
18USC656 Misapplication of Bank Funds and 18USC1005 False Entries in
Bank Records.
He wanted to add 18USC1956 Money Laundering for keeping money in
the account I had set up in my father’s name, 18 U.S.C371 Conspiracy to
Misapply Bank Funds for falsifying books and records to sell T-notes to
make the interest payments instructed by Tsuda, and 18USC371 Conspiracy
to Defraud the United States for conspiring with the other two traders.
I was his star witness. Without me, the government had no case. They
had not unearthed anything on their own. It had all come from my
confession letter. All they needed to convict me and Daiwa was for me to
say, “Yes, I am the author of the letter, and everything in it is true to the best
of my knowledge.” It was the easiest case the government ever had, so long
as I was willing to cooperate. But instead of rewarding me, they proposed to
make me bullet-proof by slapping me with every possible charge so the
defense attorney would not be able to claim I was concocting a story, in
return for a lighter sentence.
 Vince said it was best to do whatever they wanted because the more I
did for them the more they would push for a lighter sentence. So I pled
guilty to money laundering, conspiracy to defraud the government, and
conspiracy to defraud a bank.
Had I not cooperated, the offense level according to the sentencing
guidelines was 25, which called for four to six years in prison.
By pleading to additional charges they would never have discovered on
their own, though, my offense level went up to 29, which called for seven to
nine years in prison. Having worked in the world of finance where 2 + 2
was always 4, the value of doing this was hard to accept. Frustrated with the
ambiguousness of 5K1.1, I asked Vince, who had been an Assistant U.S.
Attorney himself, to clarify my deal: “So, by incriminating myself further,
what do I get in the end?”
All he would say was, “The government will write a good letter to the
judge.”
“A good letter? How much is it worth? I can plead guilty to what I am
charged with and get four to six years right now. In order to assist the
government, I could be increasing my time another three years. What am I
getting at the end?”
“No one knows what the judge will do. All a 5K1.1 letter does is give
him the power to depart downward. The more you assist the government,
the more he is likely to cut your sentence.”
“Since I was facing four to six years without cooperating, I guess it’s
pretty much a given that I’ll be sentenced to time served,” I said.
I wanted him to agree, but he wouldn’t. “Look, Tosh. I’ll say it again.
It’s up to your judge. I am not going to give you some arbitrary number to
get your hopes too high.”
“Look, I’m locked up in a roach-infested solitary cell between a Mafia
hit-man and an Arab terrorist, and you’re telling me not to get my hopes
up?”
“I know it’s tough, believe me, but that’s how the cooperation
agreement works. It’s up to you to go with it or not. However, you’ve
already confessed to enough crimes that I’m afraid you don’t have much
choice. You sealed your fate when you sent your letter to the president of
the bank.” So after all was said and done, that’s where I stood.
On October 19, I appeared in court after changing into my dark
pinstripe suit. Figel had the cooperation agreement ready for my signature.
With Vince watching, I signed my rights away. Now I was the slave of an
Assistant U.S. Attorney named Reid M. Figel.
Because of the mob of Japanese reporters waiting for me to walk past
the courtroom entrance, we drove into the courthouse basement. Presiding
was the Honorable Michael B. Mukasey. He would not be my sentencing
judge, who would be chosen later by a lottery.
When the judge entered the courtroom, the clerk called out, “All rise!”
He asked if I was mentally healthy, capable of understanding English, and
had consulted a lawyer. Then he asked if I understood that by pleading
guilty I was giving up my right to a fair trial where the government would
have to prove my guilt beyond a reasonable doubt. He also asked if I
understood that, by pleading guilty, I had given up my right not to
incriminate myself. He said he might ask questions about what I had done
to satisfy himself that I was, in fact, guilty of the charges, and I would have
to admit my guilt in my own words.
The judge asked if I knew the nature of the cooperation agreement. I
had to say ‘yes.’ Then he asked Figel what the government’s evidence
would be should this case go to trial. Figel said it was my letter. Of course,
he had nothing else. The judge went on and on to make sure I knew what I
was doing. I wanted to say, “Your honor, I screwed myself when I wrote the
letter without consulting a lawyer, and then I screwed myself again when I
admitted writing it to the FBI, and then I screwed myself once more by
explaining all the details of these complex matters, so at this point I have no
choice.”
Then came the meat of the allocution. The judge asked, “Mr. Iguchi,
would you please tell me in your own words what you did that makes you
believe you are guilty of the charges contained in this indictment, to which
you have offered to plead guilty.” I started by saying, “I joined Daiwa Bank
in 1976,” and delivered an abbreviated version of my life story. When I was
done, having pled guilty to Federal crimes, I was officially a convicted
felon. I took off my suit and changed into the marshal’s blue garb. Now I
really looked like a criminal. I was kept in a holding cell at the courthouse
with several other defendants.
One Hispanic guy told me he faced thirty-years but was going to rat on
everybody to reduce his sentence: “I don’t fucking care, man. I would rat on
anybody to get some time off.” He was signing a cooperation agreement, as
had I, but we had nothing else in common. “All the Puerto Ricans in here
are snitches, man,” he continued. “That’s how the government broke the
gang. All they have to do is get one guy at the top. He snitches on five guys,
and then these five guys snitch on twenty. The more guys you snitch on, the
less time you get, man. But those last twenty guys who were arrested had
no one else to snitch on, so they’re all looking at thirty years and calling us
snitch-asses. They weren’t the guys running things, but just followed
orders. It’s really fucked up!”
After three hours, a total of fifteen inmates were chained in a line and
marched under Pearl Street back to the MCC. They all looked like serious
criminals, and I was chained with them, pulled through the cold and dark
underground path like an animal. It was the lowest point in my life. Or so I
thought.
My biggest concern was what effect my statement would have on
Akemi, who was in Tokyo. The media would put their own spin on it and
report my allocution on the front page because this was the biggest financial
scandal to rock Japan.
I worried how she would take the news of my embezzlement, which put
me in a different light. Although she knew I had no extra money lying
around and had carried a $250,000 mortgage on a $300,000 home since
1991, the fact that I hadn’t told her might cause her to think twice about me.
I had absolutely no desire to go through the legal process unless I could
share a life with her at the end. I had kept my promise. Ben had started
Colby College, and Ryan was safe with his mother. I had no more miles to
go before I sleep . 4
If she decided to end our relationship, I felt I would deteriorate into a
mindless zombie. I had suffered for twelve years; without her, I wouldn’t
have the strength to suffer for another lengthy period. The worst part was
that I couldn’t just call her and ask.
The next day, as I expected, the information I had provided proved
much of the bank’s claim to be false. Senator D’Amato demanded a hearing
on Daiwa. In Japan, Yamaji, who had already resigned, told the press that
the bank had not concealed anything, but only tried to verify my confession
before disclosing it.
On October 25, Akemi returned to the U.S. Stroz arranged for me to
meet her at the U.S. Attorney’s office. When I heard she was back, I had
mixed feelings. While I was ecstatic about her deciding not to dump me,
part of me was saddened by her being dragged into this. She was still in her
twenties, bright, pretty, vivacious, full of energy, and with a whole
wonderful life ahead of her. Here I was, a forty-five year old convicted
felon with nothing to my name. Despite twelve years of misery, I was
looking at more incarceration and punishment. For her sake, I wished she
had chosen not to return, yet I needed her as much as I needed air to
breathe.
At the U.S. Attorney’s office, I put on a sweater so I would look less
like a criminal. When she came in, we hugged for several minutes.
“You came back,” I whispered in her ear, holding her tight.
“I am staying with you…forever,” she exclaimed.
“Thank you. I will never let you go again.”
After we had held each other for some time, Stroz urged us to go into
the conference room to talk.
I asked her, “What made you return?”
“Because I love you, silly.”
“Oh…but what happened? Did you convince your parents?”
“Of course not, I had to promise I would never see you again before
they would let me come back to the U.S.”
“I guess they’ll never forgive me for stealing your heart.”
“No, probably not, but that’s their problem, not ours. We have too many
other things to worry about right now.”
“True. I am worried about you being out there alone.”
“You don’t need be. I am much stronger now.”
“What do you mean?”
“I did a lot of thinking in Japan. This was the most difficult decision I
ever had to make, and I had nobody to confide in. I had to do it on my own.
I stayed in my room and looked at our pictures and the letters you had
written to me. All I could think of was how happy I was being with you.
And, out of nowhere, I found an etching I had done in college, the one on
which we wrote Robert Frost’s poem. I read it and reread it, and tears began
streaming down my face. ”
“Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth
 “Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,
“And both that morning equally lay
In leaves no step had trodden black,
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.
“I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I –
I took the one less traveled by,
And that has made all the difference.
“I knew exactly what I wanted to do. I couldn’t wait to come back and
tell you.” Her eyes glistened with joy but I felt deep sadness underneath her
smile.
“I am proud of you for making up your own mind. But I’m afraid I
won’t be able to help you. I’ll worry every minute of the day whether or not
you are okay.”
“Tosh, you don’t need to protect me anymore. I think God is giving me
a chance to grow. I know I have to do this all alone. As long as I know that
you love me, I can overcome any obstacle.”
“It’s amazing, but I feel the same way.”
With this pledge, it seemed the work of rebuilding my life had begun.
One day, we would go to City Hall, which I could see outside the
conference room window and exchange rings. In the meantime, Akemi had
an enormous amount of work. My house had been abandoned since she
went to Japan. I had forfeited my assets to the government, so I no longer
owned anything on that property, but there were many personal items that
had to be removed. My sons had their things there, too. The large pond I
had built and stocked with twelve-inch koi fish had to be cleaned or all they
would die. Hundreds of bills in the mailbox needed to be paid. The
government demanded I turn over the deed to the house and the titles to my
cars, though nobody could do that but me.
When she went to the house, memories of our happy days were nowhere
in sight. The yard and pond were covered with leaves. The clogged filter
made a gargling noise. The listless fish were barely alive. Newspapers had
been thrown in the driveway, and the mailbox was full. The house was cold
and dark. She turned on the lights, set the thermostat to 70, and went to
work.
The guard came to my door around 6:00 almost every morning and said,
“Egooche, you’re going to court. You wanna take a shower?” He didn’t
really know where I was going, just that I was going out. It was his
responsibility to get me ready. A defendant could be going to court or to the
U.S. Attorney’s office. Anyone having business with the U.S. Attorney was
seen as cooperating with them and viewed as a rat. I was technically a rat,
but not really, because the bank had ratted on me first.
Defendants in the jail were treated like take-out dinners. If the U.S.
Attorney wanted to talk to someone, he first had to submit a request to the
Marshal’s office a day before. Then the marshal submitted a request to the
MCC R&D to pull them out. It took an average of four and a half hours to
go from my cell to Figel’s office, which was a mere 50 yards away. At each
security point, I was put into a tiny concrete holding cell with urine stains
on the walls for an hour at a time. What I hated more than anything was
four demeaning strip searches en route to the U.S. Attorney’s office.
Clink, clink. “Egooche, you’re going to court.”
It was 5:45 a.m. “Why are you waking me up this early?” I protested.
“Get me up at 9:00.” I was getting tired of this. I didn’t need to be there
until 11:00 a.m.
“Come on, Egooche, you know it doesn’t work like that.” “No, I don’t.
You tell me why it takes four hours to get there.”
“Come on, let’s go,” he nagged.
“I am not going today.” I was fed up with the nonsense.
“If you don’t get yourself ready right now, you’re getting a shot!” 5 he
exploded.
After the shower, he brought me a breakfast tray. I took a banana and
dumped the rest in the toilet. The guard handcuffed me behind my back and
escorted me to R&D, where I was put in a 4’ x 7’ holding cell until the
marshals came to get me.
To avoid claustrophobia, I did stretching exercises, push-ups, and
pacing for thirty minutes, and then tried to sleep on the concrete bench. The
cell smelled of urine, and there were semen stains on the wall. It was
disgusting.
They usually collected me around 10:00 a.m. They would take me out
of the cell, and a marshal would put handcuffs on me. We’d walk through a
corridor to the old courthouse across the street, where I was put in another
holding cell until an FBI agent could get me. Some days this happened right
away, but other days they didn’t show up until 1:00 p.m.
The marshal’s cell was larger, so I could jog in a circle for as long as I
chose. Because I was a total separation case, they couldn’t put anyone else
in the same cell. Finally, an FBI agent would take me to Figel’s office.
All the documents the FBI had confiscated from the bank were stored in
cabinets along the walls of the "War Room", a former storage room. Most
of the hundred boxes were correspondence and reports written in Japanese.
An agent was assigned to label them according to their contents. But he had
no clue, so naturally I had to read through each item and tell him what it
was and if it was relevant to their case.
Only a month ago, at Tsuda’s apartment, I was given a job by the bank
to verify the amount I claimed I had lost, and now I was sitting down in a
similar manner in the U.S. Attorney’s office going through all the
documents they had confiscated based on my information. Not that I
minded, but wasn’t somebody else supposed to be doing this? Having been
working non-stop since my confession, I wondered if this was some kind of
self-service scandal.
I began going through a mountain of materials in search of forensic
evidence the government could use to support charges against Daiwa Bank.
While the U.S. Attorney was moving fast to indict the bank, the Federal
Reserve planned a hearing on December 27 to decide what to do with
Daiwa. Apparently they were not coordinating their actions.
From what I could see, the DOJ was not happy about the Fed not
reporting the violation of U.S.C 1005 Section 18 to them back in 1993 and
not finding the major fraud when it was staring them right in eyes. Also on
the defense chair was the MOF was who was pleading to the Fed for
leniency, not knowing that the Fed was busy trying to save face themselves.
 At the end of October, Figel went to Washington D.C. with Mary Jo
White to finalize the indictment. Meanwhile, the MOF sent two senior
officers to the Federal Reserve Board in Washington to try to moderate the
penalty. They were appalled when they found the Justice Department
getting ready to indict Daiwa. It was unthinkable in Japan for the
government to prosecute a bank because it was like shooting one’s own
foot. The regulators and the prosecutors consulted with the administration
in case there were high-level diplomatic concerns that would have to take
precedence. The message that came back was to deal with the whole affair
by the book.
On November 2, 1995, the Federal Reserve Board and the state banking
regulators of six states issued a ‘cease and desist order’ to Daiwa Bank for
three years, and the New York State Banking Department and the FDIC
issued a ‘cease and desist order’ to Daiwa Trust. At the same time, the U.S.
Attorney’s office for the Southern District of New York issued a 24-count
indictment, and the FBI arrested Tsuda for concealing a felony.
Resolved to fight, Daiwa Bank pleaded not guilty at its arraignment.
Meanwhile, the MOF intentionally leaked talk of a merger between Daiwa
Bank and Sumitomo Bank, which would create the world’s largest bank.
Although both banks denied it, since it had come from the MOF, it was
considered a done deal. This mega-merger talk managed to neutralize the
negative implications for Daiwa of losing a license in the U.S. and being
criminally charged by the U.S. Attorney.
The the Fed’s attitude changed abruptly upon learning of Daiwa’s lie
about reporting the incident to the MOF for the first time on September 18.
While I was telling the U.S. Attorney that Daiwa had reported my loss
to the MOF on August 8, Daiwa and the MOF were telling the Fed that the
first time Daiwa contacted the MOF was on September 12. The the Fed
didn’t realize it had been lied to until it learned of Daiwa’s deception
through the U.S. Attorney’s office. When the Fed learned they had been
duped by the MOF and Daiwa, and that this was not the first time, they
yearned to retaliate.
The government’s action was not universally accepted. The New York
Times pointed out: “The stiff potential penalties could leave the
Government open to criticism that it has employed a far harsher standard
for a foreign bank than has been applied in cases involving American
brokerage firms. For example, prosecutors elected to bring no criminal
charges against Salomon Brothers, Inc. for having illegally obtained
millions of dollars through fraudulent bids in the Treasury markets in 1991.
Last year, Ms. (Mary Jo) White, the Federal prosecutor, chose not to indict
Prudential Securities for taking more than $1 billion from 100,000 investors
through the fraudulent sale of risky limited partnerships.”
The U.S. Attorney’s office showed no respect for any regulators. Figel
flatly refused their request to interview me.
The Federal Reserve Bank and the New York State Banking Department
were not allowed to investigate on their own. When a crime is committed,
the Justice Department moves to the forefront, but the regulators should be
made aware of what happened in order to take corrective action. However,
the U.S. Attorney’s office refused to share information with the Fed as a
way of retaliating for not being informed of violations back in 1993. After
four months of deliberation, the Fed had determined it was a violation of
federal law to lie to the Fed examiner. But they had not reported this to the
U.S. Attorney’s office as they were obligated to, possibly to protect their
own hide.
My transgression was no longer the focal point. I had become a pawn in
a battle between more powerful forces. Yet because of my premature
cooperation, there was no chance I would be able to derive any advantage.
In fact, I had to fight just to stay alive.
 Chapter 19

Dangers of Jail
I had a brief respite in the first week of November when my sister came to
the States to help Akemi move. She was a year older than I, and she was
married with two children. They visited me on the second day. During
lunch, my sister hugged me and told me my mother wished she could have
come, but her doctor wouldn’t permit her to travel. I thanked her and
wished her well. She stayed for a week to help Akemi pack everything in
the house and move to an apartment in Fort Lee.
Since I received many letters from friends and relatives in Japan asking
why I was not out on bail, I decided to ask for it. After all, no defendant in a
white-collar crime was refused. I mentioned it to Figel, who said he would
object. He wouldn’t give a reason, but it was obvious: he was afraid I would
flip back to Daiwa and stop cooperating. It was said Daiwa could be fined
as much as $1.3 billion. At this point, it was going to fight the charges in
court. Regardless, I was entitled to bail until sentenced, so Vince filed for a
bail hearing.
We appeared before Judge Kaplan. Despite all the information I had
given them, even while incriminating myself in the process, the government
said I could best be described as a reluctant cooperator facing more than ten
years of prison and posed a high risk of flight. The judge concurred, and
added that, given the nature of the charges made against others, he could
not ignore the existence of at least some risk they might want to assist me or
persuade me to flee. The application was denied.
Because I was such a valuable witness, the government couldn’t risk
losing me. They were afraid that my loyalty was still with the bank and I
was only cooperating because I was incarcerated. What they didn’t
understand was that I had simply tried my best to prevent the bank from
suffering any more loss. That was my way of saying, “I am sorry” to Daiwa
for creating a problem. But I had done all I could, and at this point, I had no
more loyalty to the bank. Nevertheless, given the huge fine at stake, their
concern was understandable. It wasn’t personal; it was just good business.
 Being fair to the defendant was not part of the equation. With a nice
5K1.1 dangling in front of me like a succulent carrot, I realized that I was
indeed a slave to Figel.
More than not getting bail, I was disappointed that they put me in the
same light as a criminal who was there only because he had been caught.
After six weeks of working together, they should have known I wouldn’t do
anything to jeopardize the chance for my redemption and new life.
Certainly the bank might offer me $10 million to flee. But if I had wanted a
fugitive status with millions of dollars in a Swiss account, I could have
done that by myself during the previous twelve years. They forgot I had
sent out millions and millions at a moment’s notice without anyone asking a
single question.
So, I was to be the first white-collar defendant to be denied bail because
I was too valuable to the prosecutors. This was particularly difficult for me
because I needed to tie up many loose ends before I went away. When the
FBI lured me out of my house, I wasn’t prepared to leave it for good. Any
defendant who does not pose a threat to society is given a chance to tie up
loose ends, especially if he has no family members to take care of these
things.
Akemi was not my wife. Had Akemi not returned from Japan, no one
would have picked up the hundred bills overflowing the mailbox. The
house could have been vandalized and my personal possessions destroyed.
The water line could have frozen and burst. Did the government care? Of
course not. Would they compensate me for my extraordinary hardship? I
hoped so, but I knew better.
That night, I called Akemi and told her the disappointing news. “They
think I pose a risk of flight.”
“That’s ridiculous! Why would they think you would want to do that
now?”
“They’re afraid the bank would offer me lots of money to flee and
provide me with a passport.”
“They are so stupid! Then you’d be a fugitive. A criminal.”
“I guess some people opt for that. But you know what? If I were the
bank, I’d arrange to have me killed instead, and make it look like an
accident. That would be cheaper. And it would cover them forever.”
“Do you think so? I never considered that. Maybe it is safer for you to
be in there.”
 I didn’t tell her I was just as much at risk inside, surrounded by killers.
Although I’d been dealt bad hand after bad hand, I’d decided to let my fate
lead me. My focus was to be an honorable and respectable person for
Akemi and my sons. What had been done couldn’t be undone, but I truly
thought God had sent her to me so I would do the right thing. Rebuilding
my dream could be done, and I was determined to do it.
The guard screamed from the grill: “Egooche, pack up!” This was the
most disturbing order, because he wouldn’t tell me why. It was like the
police coming to your home and telling you to get out without any reason.
All the guys on the tier were looking through their peep windows to see
what was going on, just like cows in a pasture. I spread my sheet on the
floor, threw everything in, tied a knot at the top, and prayed they were not
taking me to one of the dreadful places they had mentioned. The guard
came to the door, opened the tray slot, and told me to cuff up. Because I had
to carry my belongings, I was cuffed in front—a rare treat.
I was taken to M-Tier, one level underneath. There were five Latin King
members on the tier. The Latin Kings were considered the most notorious
and best organized street gang in New York. With beginnings in a Chicago
jail in the mid-1940’s as a self-protection organization for Hispanic inmates,
the Almighty Latin King Nation had started its New York charter in 1986,
and had several thousand members.
Thirty to forty Latin Kings had been detained in the MCC in
conjunction with the arrest of Luis Felipe, a.k.a. King Blood. Called ‘First
Supreme Crown,’ he was on another tier across the hall. They all went by
their a.k.a., which began with ‘King....’ The guys on my tier were kept
away from the rest of the gangs because they were ‘rats.’
They had been charged with dealing heroin and crack cocaine in the
West Farm section of the Bronx and murdering 17 people. They were in
their 20s and looking at twenty-five years in prison.
Besides the Latin Kings, there was a French drug smuggler in his 50s
called ‘Frenchie’, who had been caught with 10 kilograms of heroin in his
apartment. They said he would never be out on the street again.
‘Rec’ time was about an hour. During this time, each one paid me a
visit, and I had to tell them my story, which had been in all the papers. King
Monk, the number three in the hierarchy, had read about my case and began
telling me to make a deal with the bank: “Hey, yo, Egooche, you’ve gotta
let me work on this, man. I can make one phone call to my lawyer, and he’ll
talk to the bank’s lawyer. We can get—, are you listening? We can get
twenty million easy, man!”
“I can’t double-cross the government now,” I said. “They’d put me
away for twelve years!” “So what? You’ll be a fuckin’ millionaire when
you get out. Twelve years will fly by, man. You can give me a quarter; that’s
all. Listen, Egooche, I wish I was in your shoes.” He went on and on for
hours. I didn’t think it would be wise to tell him to shut up. He gave me the
pitch almost daily. To avoid offending him, I promised to consider it.
Although they didn’t bother me at first, the decibel level of their voices
became so high that I couldn’t think. They would talk to each other
incessantly through six-inch concrete walls and two-inch steel doors as if
they were in the same room. After a week of Latin Kings screaming in both
English and Spanish, I was going out of my mind.
I began writing my life story, in case something happened to me. But
the loud noise pounding my eardrums day and night made it difficult. Some
nights, the cacophony would go on until three or four in the morning. I
began looking forward to being locked in the holding cell en route to the
U.S. Attorney to momentarily escape the chaos.
When I told Akemi about this, she came up with a great idea: ear plugs!
Because they were not allowed, the only way to get them would be to
smuggle them in. Each time I went to work at the U.S. Attorney’s office, I
carried an accordion folder for the books and newspaper articles she
brought me. I could call her at her office in the World Trade Center when I
got there so she could bring me lunch, and we could spend thirty minutes
together. One day she brought a pair of ear plugs, which I put in the folder.
They checked my folder at R&D while I sat in the holding cell for two
hours. When I came out and got it back, the earplugs were gone. I had to
devise some other way to smuggle them in. In the meantime, I wrote to the
Captain of the MCC, requesting he move me back to the L-Tier, where
everyone was more mature and quiet. No response ever came.
It was not possible to carry anything on my body because every time I
went through the R&D, I got strip-searched. Standing buck naked in front
of a guard was another one of those things I had to accept. The sequence
went like this:
“Okay, raise your hands, ruffle your hair.
Now, open your mouth and lift your tongue.
 Pick up your joint.
Okay, turn around and bend over. Spread your cheeks.
Now let me see your soles.”
I had to do this once on the way out and twice on the way back in.
Before I went insane, I was determined to smuggle in earplugs. Akemi
finally came through for me. She found jelly-like earplugs I could spread
between the pages of a book. On the way back, I packed ten books in my
folder, one of which had two strips of earplugs. It worked. When I returned
to my cell, they were still there. I put them on and could barely hear the
screaming.
Not happy with Akemi coming for lunch, Figel told me she couldn’t do
it anymore. It was preposterous, because, when I had been in the MCC, she
had visited me three hours each day of the week.
There was no harm in her being there for half an hour, but he had to
have his way. He claimed the defense attorney might call it special
treatment to induce me to lie. I told him how unhappy I was and that it
would not give me much incentive to find forensic evidence embedded
deeply in the documents. His response was if I held back anything, he
would not give me a good 5K1.1 letter.
Infuriated, Akemi told Stroz how unhappy we were of Figel’s decision
despite my invaluable assistance to the government. The next day, I was
taken out of the MCC as usual but instead of going to the U.S. Attorney’s
office, Stroz came to get me. He told me to put on my sweater and we went
outside, still handcuffed in front. Around the corner, he removed the
handcuffs. “You don’t need these. So, what do you feel like eating?” What a
bold move! One minute I was locked up under maximum security, and now
I’m walking around outside like an average person. When the Assistant
U.S. Attorney was telling me that I could no longer see my fiancé at their
office, Stroz would take me out on the town. We walked over to Broadway
and went into McDonald’s.
While we were eating, he explained to me that he had a heated argument
with Figel as he believed that I deserved some extra accommodation, for I
was locked up in such horrible conditions. He apologized for not being able
to overturn Figel’s decision, as if it were his fault. “I don’t regard you as a
criminal. I know you are a respectable man who made a simple mistake and
have suffered many years for it. I will do my best to make your life easier.”
 From the day he came to my house, he treated me as a person, not a
criminal. He had gone out of his way to make sure I got to see Akemi
because he knew how much she meant to me. On the first day, he promised
to support me as long as I did the right thing. His sincerity struck my heart
in such a way that from this day on, I became his biggest fan.
On November 22, Stroz was taken off the case because the investigation
was over. He was much too valuable to be hanging around on a case that
was pretty much done. There was no way Daiwa would go to trial, which
could drag on forever with no chance of winning; no Japanese bank would
ever win any criminal trial in the United States. It was simply a matter of
negotiating the amount of the fine.
When I was looking through the confiscated documents, I saw a report
that had been written to the Fed. As I read it, my blood started to boil. Now
it all made sense. When I started working at Tsuda’s house, Yamaji and
Yasui went to the NY law firm of Sullivan and Cromwell and were told to
submit a criminal referral form to the Federal Reserve Bank. Banks were
required to report any criminal activity they found within 30 days to the
Fed. Daiwa told the MOF, which ordered it to inform the Bank of Japan.
They had finally gone to the Fed on the 18th of September, almost sixty
days after receiving my letter.
Daiwa had told the Fed that the MOF had also just been notified and
requested this be kept quiet at least until September 30, when the first half
of the fiscal year ended. The the Fed asked if there was any risk I might
flee, so Daiwa said they would hire a private investigator to follow me. To
be fair to me, the Fed official even suggested, “Why don’t you tell him to
obtain an attorney because you reported him to the authorities, rather than
keeping him in the dark?” Daiwa chose not to tell me for fear that the story
would be exposed prematurely. What bastards!
So they had all known. Araki knew I had already been reported and was
being followed by the bank’s private investigator. It was not Daiwa Bank
that I was angry at, nor its shareholders. On the contrary, I had confessed to
the bank to prevent it from losing any more money because I felt
responsible. But I was angry at those Directors who threw me under the bus
after I tried to do the right thing by them.
As I continued to dig into the documents, I found the minutes from the
meeting with the MOF. It was the first meeting with the head of the banking
department. “We received a letter from one of our local employees in New
York saying he had lost $1 billion trading Treasury bonds,” Fujita had said.
“How come you didn’t find this out earlier?” Nishimura, the head of the
banking department, asked.
“He had a very intricate scheme to hide the losses.”
“How grave is a $1 billion loss perceived to be in the U.S.?” Nishimura
asked.
“Well, there was the Barings loss, which was about the same amount.
That was very grave indeed—the bank went under.”
“This is not good timing. We’d like to tackle this after we settle other
matters. Make sure it doesn’t leak from the trader.” This uninformed
warning from the banking department must have made Daiwa’s directors
afraid of what I might do. Ignoring the fact that I had come forward in
secrecy so they could take whatever action they chose, Daiwa began
looking at me as an enemy within, rather than as an ally.
Daiwa was hoping the MOF would tell them to ‘bury it,’ but Nishimura
was not aware of the whole picture. Had he known that Daiwa had already
buried a $100 million loss by Daiwa Trust in 1987 and had been cited for a
Federal crime in 1993, he might have acted differently.
Christmas was a tough time to be in a jail. All I could see from the
window of my cell was the courthouse roof. A large security light dangling
from the corner rattled as gusts of wind blew against the building. In the
late morning, some flurries of snow began dancing around. The only
thought in my mind was Akemi, who was to visit me at noon. It always
worried me when she had to drive in snow.
Because the defendants in the segregation unit of 9-South had total
separation status, the visiting room was used by only one at a time. In other
units, the same size room was used by as many as fifty people together. To
have a special three-hour Christmas visit, those of us in 9-South had to
triple up. We had to declare which defendants we had no problem with. I
said I was okay with Scarpa, the Mafioso, and Marzook, the Hamas. They
were on L-Tier, but I would rather be in the same room with them than a
Latin King. One day Scarpa said to me, “Yeah, I hear those kids are vicious.
But if I see them in my territory, I’ll kill them all.”
Scarpa had been in prison since the late 1980s for racketeering, loan
sharking, illegal gambling, tax fraud, and five murders. His father, who died
in 1994, had lived his entire life on the edge, functioning as a top-echelon
FBI informer for 35 years.
Abu Marzook had been arrested in July 1995 at JFK Airport when
immigration inspectors noticed he was on a list of possible terrorists. As a
political leader of the Islamic fundamentalist group Hamas, he was
suspected of financing and planning terrorist attacks against Israelis.
Immediately after his arrest, Israel requested his extradition. He had nothing
to do with Ramzi Yousef, the mastermind of the World Trade Center
bombing.
Akemi was planning to drive to her friend’s place in Cape Cod after
visiting me. I knew she would not be late for our time slot, from 12:00 p.m.
to 3:00 p.m., but I got more and more jittery the longer my name wasn’t
called. At 12:30 p.m., I finally heard, “Egooche, visit!” To not waste any
time, I yelled back, “Let’s go, I’m ready!” But it was impossible to get the
guard’s attention without yelling like the Kings once he started to walk
away. Nevertheless, I continued to scream, “Excuse me, I am ready! Let’s
go!” I saw the precious time shrinking as he nonchalantly walked around
without hearing me. A King who was close to the grill heard me and yelled,
“Hey, yo C-O 6 , Egooche is ready, man! Get on down here!” The guard
came running, opened the grill, walked over to my cell, and unlocked the
flap. As I got handcuffed in back and walked by the first cell, I said,
“Thanks.” The King nodded his head and said, “Have a good visit, man.”
The guard took off the cuffs before I entered the visiting room. When I
went in, Akemi was sitting between Scarpa and his wife. I said, “So, you’re
getting cozy with Italians.” She rose, and we hugged for a while and then
sat down in a corner. I asked her when she had arrived, and she told me at
noon, sharp. During her visits, we usually had barely enough time to talk
about anything. At least we still had two more hours. She had no idea who
Scarpa and Marzook were. It made no difference to her, because she was
friendly to anyone who wasn’t harmful to me. She would spend an hour
talking to Scarpa before she would spend a minute with Figel.
We had a nice time. As usual, it zipped by, and I was taken back. The
part I hated most was the strip-search afterward. With the warm feeling still
intact, I had to go through the dehumanizing process of being treated like an
animal. The only way I knew how to maintain my sanity was to detach
myself from the savagery around me. To do this, I concentrated on writing
my story, with earplugs shutting out everything around me.
 The Japanese media had been covering the Daiwa scandal very closely,
reporting the development from various angles. While the Fed was able to
blame everything on Daiwa and escape any major criticism, the MOF
hadn’t been so lucky. By deporting the rogue bank to Japan, there were no
issues left in the U.S. to deal with. However, the MOF was being attacked
for its handling of the Daiwa problem.
The U.S. Government officials were ecstatic over this development
because the MOF had been stubborn and uncooperative about opening up
Japan’s financial markets. The Daiwa incident was not the first crack in the
MOF’s teflon exterior. After a half century of unchallenged power, the
system it had created was beginning to show its flaws. Once the enormous
asset bubble burst in the early 1990s, the value of property, the main
collateral for most of the loans, began to decline. Coupled with a 60% drop
in stock prices, financial institutions large and small were under severe
strain.
The most critical mistake the MOF had made was to tie its banking
system to the stock market by allowing banks to count 45% of unrealized
profits on their stock holdings as capital.
By doing this, the Japanese financial system became hostage to the
stock market. Since 1992, the whole country had been praying for the stock
market to rise, because if it went much below 14,000, the unrealized profits
on the stockholdings of the major banks would be wiped out. In order to
prop up stock prices, the MOF instituted a number of what is called ‘PKO’
(price keeping operation) by buying stocks. When that didn’t work, every
time the Nikkei average neared 14,000, the government implemented fiscal
stimuli to the tune of $600 billion to please the market. Despite everything
the MOF did, the Nikkei was nearing 14,000 again.
As if declining stock prices were not enough, the financial institutions
which had overextended themselves during the late 1980s and early 1990s
began failing at a rapid clip. The MOF was chastised for protecting banks
against the market forces and conducting its business in secrecy. Until the
Daiwa incident, though, no one openly criticized the closed-door policy of
the MOF because the banking industry and the business community were
all in it together.
In return for their absolute loyalty, Japanese business executives knew
the MOF would always protect them. Japan was like a huge family with the
MOF at the head of the household. It could always solve any problem.
However, when it tried to save those two credit unions by its traditional
method of ‘sharing the responsibility,’ it could not pull it off.
As the New Year began, there were talks of a plea agreement between
Daiwa and the U.S. Attorney, but the speculation was premature. I was
getting restless, since a trial would take at least a year. If I were going to
testify, I would probably have to stay in jail. I didn’t really see any chance
of Daiwa going into the courtroom to fight the charges, though, because
Japanese banks detested negative publicity, as did the MOF. The U.S.
Attorney also needed to avoid a trial. If Daiwa were tried in the U.S. courts,
many of the defense witnesses who were in Japan, including the MOF
officials, would have to be either subpoenaed to the United States or made
to testify on closed-circuit TV. The possibility of putting MOF officials on
the stand was next to zero. In fact, Japanese courts could deny access to
witnesses on the ground that the crime Daiwa was accused of committing
was not a crime in Japan.
On February 2, 1996, Daiwa Bank closed all its U.S. offices. It had been
twenty years since I walked into 140 Broadway for an interview. Now the
bank was gone. This was the equivalent of death sentence.
Although I felt sad, I had tried to save them. But they had been ill-
advised by their lawyer and turned me in without warning. To get the best
advice from a lawyer, he or she must be told everything. Without complete
knowledge, a lawyer can’t possibly come up with a good strategy.
Tragically, Japanese people were not used to dealing with lawyers. A
hundred million people who live on islands no larger than the state of
California co-exist without lawyers because, in its 2,000 years of history,
Japan developed its own culture combining traditions, rules, ethics, values,
morality, manners, and common sense. The Japanese people had maintained
a homogeneous race and didn’t need to rely on law to settle disputes.
On the other hand, the United States had to have written laws to protect
everyone’s rights because it represented a broad variety of people from
many countries, with numerous cultures, and varied beliefs and religions.
For people with different cultures to coexist, laws had to be created that
would encompass all.
Daiwa insisted the delay in reporting the incident to the U.S. authority
had been due to the difference in culture.
However, that wouldn’t wash here, because American law was designed
to cover the interactions of opposing cultures.
 The trial was scheduled for March 15. Both sides were eager to avoid it,
but neither could accept the other’s offer—$150 million by Daiwa and $500
million by the U.S. The strategy for each was to go right down to the wire
and force the other to give in.
Figel was irritated because he wasn’t prepared for a trial. All he had was
my confession, my statement, and the forensic evidence I had dug out. In
mid-February, Daiwa requested a trial by judge, rather than by jury. It was a
bluff, but effective.
On the 21st of February, Figel came back from a meeting and said to
me, “We are going to trial!” I couldn’t believe it. No logic dictated this
outcome. There was no way the MOF would ever let it happen.
On February 23, the most obnoxious King of all, King Cobra,
demanded I give him my banana. I told him, “No, I’m eating it.” He was
short, but his upper body was well built. He looked like an ape. He had the
biggest chip on his shoulder I had ever seen.
“Hey, yo, the next time they put us in the same cage, I’m gonna kick
your ass!” he shouted. “I’ll kick your ass, you little shit-head,” I responded
without thinking. I didn’t want to be in a cage with him because he was
charged with murder, and I regretted challenging him. Although we were in
a total separation status, the guards occasionally put us in the same holding
cell.
King Cobra was twenty-eight years old and had nothing to lose. He was
looking at a minimum of eight to ten years. After release, he couldn’t go
back to his people because he’d ratted on his King brothers. He had no
education and no skills other than peddling drugs. I made sure I didn’t get
thrown in a holding cell with him.
In the meantime, King Monk was pressuring me to make a deal with the
bank. I told Figel about him, but he showed no concern.
Bad air surrounded me. Five Kings were staring at me contemptuously.
In prison jargon, they were ‘mugging on me’. At dinner time, with all the
tray flaps open, King Nutty yelled out, “Yo, Egooche, come to the window
and eat with us!” I usually took my tray and ate at my table instead of
sitting on the floor by the door, but refusing would be regarded as being
unfriendly. When I took my tray to the door and looked out, King Nutty
said with a sneaky smile, “Yo, what’s up bro? I hear you’ve been talking
tough. Hey, what you gonna do if we all run in your cell and pin you down
at the next cell change?”
 “What the fuck are you talking about?” I said, trying to sound unafraid.
“You know what I mean, Egooche, when the cop opens all the doors,
we’re gonna jump you. What’re you gonna do, bro?”
I knew he was testing me, but I couldn’t let them get over 7 me. “I’ll kill
every one of you,” I replied. They all laughed, as I expected. I understood
their mentality. They only respected those who demeaned them. Politeness
lost their respect and encouraged more abuse. This was the complete
opposite of how human relationships worked in the world I had lived in for
forty-five years.
On February 26, I heard a different voice from the cell next to mine,
someone who sounded older, and non-Hispanic. I was ecstatic to find King
Monk gone. I knocked on the wall with my fist: “Yo, neighbor, when did
you get here?”
“Oh, about 3:00 a.m. last night. The guy who was here was moved out,
and I got moved over from K-Tier.” He sounded human to me. When my
turn came for ‘rec’, I walked over to his window. He came to the door, and I
saw a white man in his mid-60s. I introduced myself and said, “I’ve been
here six months, how long have you been in jail?” The man smiled and with
a Southern accent said, “Oh, about thirty-four years.” At first, I thought he
was joking, but I found out he was telling the truth. He told me he’d heard
about my case and thought the bank would settle. I asked why. He felt the
government didn’t want a trial.
The next day we had a cell change. I kept an eye on the Kings, but the
guard did it according to the rules. We had to change every two weeks for
security purposes. Staying in the same cell too long would give us a chance
to dig a hole through the wall. Since we were all in total separation status,
the guard was supposed to have eight of us change without any two coming
in contact. To do this, first one gets locked in the shower room. Then
someone else moves into his cell, and so on. If done properly, the cell
change takes at least two hours because we had to move everything,
including the mattress, with our handcuffs on. But some guards were too
lazy to do this, and if the Lieutenant was not on the floor, they opened all
the doors at the same time and we all came out and moved.
Despite the many dangers, I was gradually becoming acclimated. This
was not really a good thing.
 Chapter 20

King of Prison
My new neighbor promised to be a great help in gaining perspective. His
name was George Harp. He was now across the tier from me. We could see
each other, but couldn’t talk. Two days after we met, I heard him calling my
name. Through the glass window, I saw his right thumb up and his left hand
holding a radio. I turned mine on and heard that Daiwa Bank had pled
guilty and agreed to pay a $340 million fine. The largest criminal fine ever.
I grinned and raised my thumb. It was a great piece of news, as far as I was
concerned. Now I could be sentenced and leave this God-forsaken place.
My sentencing was scheduled for April 15, two and half months away.
In the press conference, Daiwa said it decided to settle to end the legal
maneuvering to protect its employees, customers, and shareholders. It was
important for the new president to put this mess behind and move on.
Because of the scandal, the Chairman, President, Deputy President, Senior
Managing Director, and Managing Director were all ousted. Without any
political struggle, the new boss had taken complete control of Daiwa. By
late August, after the initial shock wore off, he must have realized what a
blessing the scandal had been for him.
After several days, there was a nagging question in my mind: Had I
really done the right thing? The reason for my skepticism was the
punishment Daiwa received; everything had worked out exactly opposite of
what I had intended. After February 2, Daiwa no longer existed in the U.S.
A corporate death sentence. For Daiwa’s actions, which were nothing more
than a harmless violation of some rules, it was a unfairly severe
punishment. The record fine of $340 million should have never been
imposed, or paid. A death sentence and a record fine—what an injustice!
Either one is preposterous. Losing its U.S. presence was tantamount to a
pitcher losing an arm for an international bank like Daiwa.
I argued the case further in my mind. Daiwa’s crime did not and was not
intended to harm any American citizens. The gist of it was the concealment
of certain facts from the Federal regulators. The reason it’s a crime to lie to
the Federal banking regulators is that if a bank gets in trouble, the
government has to use taxpayers’ money to rescue it, as was the case during
the S&L crisis. Because the Fed is the lender of last resort, it examines
banks. If a bank doesn’t accurately report its conditions, the Fed cannot
correctly evaluate its soundness.
However, there was an agreement between the Fed and the Bank of
Japan that if any of the Japanese banks get into difficulty, the Bank of Japan
would be responsible for providing the bailout funds. In other words, under
no circumstances would American taxpayers’ money be used to save
Japanese banks operating in the U.S.
Given this fact, the Fed had no business even examining branches of
Japanese banks. The primary focus of the Fed’s examination was the quality
of bank assets, which was nonsense because the Fed was not responsible if
the low-quality loans turned bad, or if something else went wrong. No
American taxpayer’s money was at risk here. If the branch suffered a loss,
the Headquarters in Japan had to cover it. If the loss was too large, then the
Bank of Japan had to cover it with Japanese taxpayers’ money.
Japanese banks in the U.S. were lending money to American businesses
and to marginal borrowers that no American banks would touch. We should
have welcomed them expanding into the small business market. After all,
they were just lending us money at their own risk. Why run them off?
Daiwa Bank had fifteen branches in major American cities and made loans
to many mid-size companies. They were a real asset to the U.S.
Since the Fed began examining branches of Japanese banks in 1992
without any clear reason, Daiwa came under the jurisdiction of Federal law.
By concealing the unauthorized trading loss, it caused no real damage to
any U.S. persons or government agencies.
Unlike many corporate crimes committed by securities brokers and
banks victimizing innocent investors, Daiwa’s crime was harmless and
didn’t cost the U.S. Government one dime.
Daiwa was supposed to report any criminal behavior of its employees
within thirty days of its discovery. They were late by twenty-two days. Yet
they reported it voluntarily. For this short delay, Daiwa was extinguished
from North America and fined a record $340 million. I don’t refute it: they
broke the law. I don’t refute that they were untruthful to the Fed. But the
punishment was preposterous. Though it was not my fault, I felt responsible
for playing a part.
 What puzzled me was why there wasn’t any protest from the employees
or the shareholders of Daiwa, who were getting the short-end of the stick. If
it had been an American bank, there certainly would have been an
emotional rally, such as what happened in the downfall of Arthur Andersen
following its indictment.
Not only weren’t there any protests, but also no media criticism of the
harsh punishment appeared anywhere in Japan or in the U.S. It was eerily
quiet.
The U.S. Attorney’s office was having a ball. The public seemed to
swallow whatever story was promulgated. Anything Daiwa said was
regarded as a lie, because it had been caught lying too many times. And
Daiwa itself acted guilty, failing to clearly denounce the inappropriateness
of the penalty.
So Figel and Mary Jo White were able to paint a story of the Daiwa
scandal to fit their agenda. In a mere four months, Daiwa pled guilty and
paid an enormous fine. Why should anyone believe its crime was anything
other than what we were led to believe—or worse? What corporation in its
right mind would plead guilty and pay the largest fine in history if it wasn’t
getting off with a lesser penalty than they deserved? Judging from the
outcome, the public would believe that Daiwa had committed greater
crimes than Drexel Burnham Lambert 8 or Bank of Credit and Commerce
International 9 .
The truth of the matter is that this case was not just about Daiwa Bank.
It was the mighty U.S. Justice Department vs. the equally mighty MOF.
Had Daiwa gone to trial, its delay in reporting me would have been directly
attributed to the MOF’s instruction. (In September 2000, in the Osaka
District Court, Yasui and ten other senior executives defending a class
action suit blamed the MOF for instructing them to postpone notification.)
Then the prosecutor would have had to call Mr. Nishimura, the head of the
MOF’s Banking Department, to the stand.
Never in a million years would the Japanese government let the
situation get to the point where its official is subpoenaed to testify in a U.S.
court. But they couldn’t call the bluff of The U.S. Justice Department; it
could not have carried out the trial with the witnesses, Yasui, Yamaji, Araki,
and Nishimura in Japan. But Figel’s bluff worked. The MOF, already under
a severe strain from the failure of large financial institutions, increased its
pressure on Daiwa to bring the embarrassing situation to an end as quickly
as possible. It was a devastating defeat for the MOF, but by not saying
anything (it made no public comments other than to say it would prescribe
its own punishment once the U.S. was done), the MOF never had to
acknowledge defeat. In fact, as soon as Daiwa pled guilty, the MOF joined
the chorus of criticizing Daiwa.
As I ruminated about this, George Harp moved next to my cell again.
He had been brought here from South Dakota State Prison to appear in a
parole board hearing in May and would be leaving after that. We got along
well because I found him intelligent and was amazed at how well-informed
he was. As I got to know him, I gradually learned why he had been in for so
long. He had first gone to prison as a teenager from Cordele, Georgia, and
wound up becoming the only surviving charter member of the Aryan
Brotherhood (AB). When I asked him about this, he told me it was a prison
gang. A prison gang. Not knowing what that was, I asked, “There are gangs
in prison?”
“Oh, yeah. There are hundreds of gangs in the U.S. prisons.”
I still didn’t understand.
“Anywhere you go on this earth, there are predators and prey, especially
in prison, because there are no laws there.”
“No laws?”
“Hell no, it’s a lawless jungle. To be effective, there must be
punishment to go with the law. There ain’t much you can do to punish a
man who’s already in prison.”
“What do gangs do then?” I asked, full of trepidation.
“The same stuff Mafias do on the outside, like racketeering, drug
smuggling, gambling, extortion, loan sharking, and anything else they can
make money on.”
“You did all of those things?”
“Well, yeah, when I was younger. But not since about 1983.”
After talking to him for a while, I realized he might have been the most
experienced and knowledgeable person in America with regard to prison
life. He was a walking dictionary of the American prison system. When I
came to the MCC, I had many questions but no one to answer them. Now
the man in the next cell had the answers to all you wanted to know about
prison but were afraid to ask.
“Is it true a man can get raped in prison?” That was my very first
question.
 “Yeah, some of them do. You put a man in a world of forced celibacy,
and it’s only natural to start looking at other men. There is no punishment
for prison rapes. But you don’t need to worry about that because you’ll be
sent to a kiddie joint.”
“A kiddie joint?”
“A prison camp. Like a college campus.”
“That sounds good. Tell me more about it.”
“People call them Club Feds. All you do is play tennis and watch
movies.”
“What about violence and stuff?”
“Let’s put it this way. Prison camps are a lot safer than Wall Street. If
the inmates in prison camps get caught hitting somebody, they’re sent to a
real prison. So the penalty for violence is enormous.”
“You’re telling me prison camps are much better than here?”
“You bet. A year there is like ten days in this rat-infested place.”
Suddenly, I felt better about the future. If I didn’t get time served after
doing six months in this dungeon, I might have to do another six months or
a year in a ’kiddie joint.’ Now that Daiwa had pled guilty and cut a check
for $340 million, I was certain the most I would get would be two years.
Daiwa’s case had been the easiest, quickest, and cheapest investigation ever
in the history of corporate crimes in America; I should have asked for a
finder’s fee.
The time and expense the U.S. Attorney’s office had spent was dwarfed
by the case against Kidder’s Joe Jett, in which the government failed to
prove anything. So in terms of the monetary value of my cooperation,
without any exaggeration, I was the most valuable cooperator in history.
There was one more piece of unfinished business before I could be
sentenced. Tsuda, the ex-General Manager of the NY Branch who had been
arrested the previous November for telling his compliance officer not to
turn me in, hadn’t pled guilty. Since I was being ‘used’ by the government
to testify against him, I couldn’t be sentenced until his case was closed.
Although he’d betrayed me at the end, Tsuda was a good man. I had always
liked and respected him and felt terrible for involving him.
He had replaced Yamaji as the head of the North America operation in
June of 1995, a mere month before I confessed. Until then, he’d had
nothing to do with my impropriety. He just happened to be in the wrong
place at the wrong time. After I confessed, nothing he did was his choice.
All orders had come down from Fujita and Yasui, the President and Deputy
President, who were talking to the MOF. Whatever he was told to do, he did
without asking any questions. His loyalty went beyond that of his bosses.
And this was his reward.
During the 1980s, all Japanese businessmen, regardless of which
company they worked for, had one thing in common: They were all
employees of Japan, Inc. The MOF was the senior management.
Until the Daiwa incident, the MOF had been above the law. In fact, they
were revered almost as highly as God—the Japanese people had lost their
religion centuries ago. Tsuda was not an exception. Although he was the
General Manager of the NY Branch, he was nothing but a lowly worker in
Japan, Inc. The MOF had instructed him to not reveal the loss until the end
of September. So he followed an order from the highest institution in Japan.
He was arrested in the United States, and Figel was ready to send him to
prison for a year. The things Figel did were not for the people of his
country, but for himself and his boss, Mary Jo White. Tsuda was a loyal,
responsible, trustworthy, moral, and honorable man whom anyone would be
lucky to have as a friend. But Figel intended to force him to get down on his
knees and beg for mercy. I wanted him to fight. I wanted him to tell the
world what this was all about.
On March 21, the editor of one of the largest publishing companies in
Japan asked me to write a book about my case. It was an amazing
coincidence because I had just finished my memoir and was thinking of
contacting a publisher. In four months, I had written 380 pages in Japanese
on legal paper with a pencil. Because the guards could take anything from
my cell when I wasn’t there, I had to send out the manuscript as I wrote it.
So I mailed two to three pages to Akemi every day with serial numbers on
the envelopes. She faxed them to my mother, who typed them into a word
processor. It was tedious work, but my mother would do anything she could
to help me. At seventy-three, her mind was still very sharp.
I told the editor I already had a manuscript. He was excited and asked to
see it. I had my mother send him a disk. A week later, I received a letter
from him saying how impressed he was, and we began the process of
editing.
When I went to the U.S. Attorney’s office on April 4, I heard Tsuda had
agreed to plead guilty and cooperate with the government to receive a
5K1.1. His cooperation would be academic because the bank had already
settled the case; nevertheless, Figel wanted to use him.
Now that I no longer had to testify in Tsuda’s trial, I thought my job was
done and I could be sentenced on April 15. To my astonishment, Figel
declared that my sentencing had been postponed to September 16. Five
more months!
He said I still had to speak to the financial regulators because they had
not been able to talk to me since the scandal broke out (ironically, because
he had forbidden it). Since it wouldn’t take more than a few days, there was
no reason to delay my sentencing past May. I asked Vince to talk to Figel
but Vince’s response was, as usual, “It’s best not to upset him. Remember,
your fate is still in his hands.” What he meant was that I had no say in what
they would do, even if I had no role to play in the convictions they were
seeking.
Since George arrived, the LK boys had been less menacing toward me.
But one day I woke up to loud arguing. Peering out the window, I saw
George and King Cobra in a shouting match.
“Hey kid, you don’t want any beef with me, if you wanna live,” George
barked.
“Get the fuck outta here. You’re too fucking old to even touch me,
man.”
“If you don’t shut the fuck up, I’m gonna tear your fucking head off
next time I get the chance.”
“Get the fuck outta here,” King Cobra countered. He backed off a little,
but with the steel door between the two, he was acting tough.
When George returned from doing his hundred pull-ups, I asked him
what had happened. “These fucking kids have no manners because they
haven’t been in a real prison,” he said. “If a kid acts like that in the pen,
he’d be killed in a week. There’s a code of conduct in prison. Real convicts
show respect to each other. He doesn’t know that wherever he goes, if I
send word to take him out, he’ll have less than a week to live.”
I asked Akemi to research the Aryan Brotherhood. It became such an
interesting subject, and George was more than happy to answer my
questions and tell me about his life, that I wound up starting to write a
second book. Writing the first had helped keep me sane, and this one had
the same therapeutic effect. There was a small hole in the wall between our
cells, and day after day, George and I sat on the floor with six inches of
concrete between us, him talking and me writing, reading back a section, or
asking a question.
Because I was on shaky ground with the LK gangs, I dreaded the day
George would leave. We were friends, so the LK boys had stopped trying to
‘get over’ me.
On May 3, once again a guard yelled, “Egooche, pack up!”
By this time I had toughened up a little: “What for, man? You’d better
tell me, or I ain’t going nowhere.” I felt I had to talk that way. Had I said,
“Excuse me officer, could you tell me why I have to pack?” he’d be more
offended and ignore me.
“You’re going to L-Tier,” he responded. Amazing! It worked. I didn’t
want to leave George, as there was no telling if I would ever see him again.
But I was happy to get away from the gangs. As I carried my stuff in a
bedsheet like Santa Claus, I saw Marzook coming down with his sheet.
Apparently, we were being switched. Since there was no reason for me to
be moved, it had to be Marzook.
They moved inmates at the request of the U.S. Attorney’s office. I was
put in the last cell on the right side. There were several new faces. Across
from me was Scarpa, whom I knew. Next to him was Ramzi Yousef, the
mastermind of the WTC bombing, then King Cobra’s brother, and Ismail,
the van driver for Yousef.
To the left of me was another Arab terrorist named Abdul Hakim
Murad, who was charged with conspiracy to blow up eleven airliners with
Yousef, and two rogue NYC cops. Later, George told me that soon after
Marzook arrived in M-Tier, the guard covered up everyone’s windows so no
one could see what was going on when he was out of his cell. By looking
through the space between his door and the wall, he was able to see two
men in suits searching through Marzook’s papers. It was illegal, but there
was no witness, except George. They moved Marzook to M-Tier so other
Arab terrorists couldn’t witness the illegal search.
It was nice being in a quiet environment for a change. I didn’t need to
use earplugs anymore. Yousef yelled across the Tier to Murad in Arabic, but
his voice was high-pitched and not as irritating as the head-pounding
screams of the Latin King gangs.
Each week, we could ‘go to the store.’ That meant ordering necessities
from the commissary. We could buy toiletries, snacks, radios, stamps,
shower shoes, and a whole list of goodies, if we had money in our account.
To have it, someone outside had to send in a money order. Without anyone
to do this, life in jail could be miserable. Each Tuesday night, we were
given a blank order form to fill out and turn in the next morning. As I was
filling in mine, Murad knocked on the wall and asked me if I needed
anything. I thanked him for asking, but said, “No, I have some money. Do
you need anything?” “No, thank you,” he replied politely. I heard him ask
the guy on the other side the same thing.
From then on, I began talking to him. I learned to just ignore what the
prisoners had done outside and judge them by the way they treated me. I
liked Murad because he was well-educated and polite.
It was difficult to believe he had planned to blow up eleven jetliners. He
told me what had happened when he was arrested in the Philippines and
brought back to the States to face charges. He was a very religious man and
prayed five times a day. He explained things about the Koran.
On the other hand, for some reason, I couldn’t come to like Yousef, who
just seemed devious. My guess was that Ismail and Murad had been
exploited by Yousef. Later, George told me Yousef was suspicious of me
because I talked to Murad so much, and thought I had been sent to spy on
them. As a matter of fact, I noticed that Yousef was looking at me through
the glass on his door when I started to talk to Murad. I didn’t like the way
he was looking at me.
Yousef and Murad were going to be tried in June. They had a public
defender, but Murad was unhappy because she was not helpful.
He had no chance of being acquitted if he was tried together with
Yousef, who was known to be the WTC bomber. I didn’t know if Murad
was guilty of those crimes, but I knew he would not kill a man for personal
gain, like the LK boys. He had told me he was licensed to fly a commercial
plane, and there was a report making the rounds that the FBI had uncovered
his plot to fly an airplane into the CIA building.
A few days later, Yousef brought in a dozen cardboard boxes. When I
asked about it, Murad told me that Yousef was going to defend himself, in
which case, he is entitled to bring in any legal documents to his cell to
prepare for the trial.
He started to bury his face in those documents diligently and then, I
noticed that he started to talk to Scarpa a lot. They seemed to get along
well, which was a rather cynical combination, I thought. An Arab terrorist
and the son of a Mafia hitman. (Later I found out from George who was
with Scarpa in the SuperMax in Colorado that Scarpa was planted there by
FBI to spy on Yousef).
Every day, I spent all my waking moments editing my manuscript. In
fact, the last four to five months had flown by because I was so busy
writing. To me this book was the key to my redemption. There were many
erroneous speculations of what happened at Daiwa, but all the public heard
came from either Daiwa or the U.S. Attorney’s office and they tended to be
incomplete and stilted stories tainted by their own agendas. I felt obligated
to set the record straight. I viewed this as not just the story of a single rogue
trader, but an integral part of the U.S./Japan financial war.
Although I was a U.S. citizen and planned to spend the rest of my life in
America, my roots were in Japan, and my family and relatives were affected
by what I had done. It was important for me to redeem myself in Japan first,
for the sake of my family. To do that, I needed to make amends to the
society by telling the whole truth which was the least I could do. If my book
helped it recognize structural problems with its financial industry, my sense
of guilt would be eased.
On May 31, 1996, Figel pulled me out with no advance warning. I had
been writing until 4:00 a.m. and expected to skip everything and sleep until
noon.
The guard got me up at 6:00 a.m. and told me I was going to court. I
looked shaggy because I did not want to get a haircut. We were given an
opportunity for a haircut once a month, but King Cobra’s brother was the
barber. I refused to go into a cage with him holding a sharp pair of scissors
so I had been using my razor to cut my hair in the shower. Because they
gave us only one razor a week, I hadn’t been able to shave in three days. On
top of that, my hair had turned grizzly, as if I were aging rapidly due to my
circumstances. I probably was.
Figel told me I was to speak to a host of regulators and led me into a
room full of representatives from the Federal Reserve Bank of New York,
the Federal Deposit Insurance Corporation (FDIC), the State Banking
Department, the Securities and Exchange Commission (SEC), the
Commodities Futures Trading Commission (CFTC), and the accounting
firm of Arthur Andersen. I knew it was not a job interview, but I was upset
by the lack of courtesy.
Before beginning, Figel explained how it would be conducted. The
regulators could not take any notes and could not address me directly. All
questions had to be asked through him. The institutions which regulated and
oversaw the financial markets of the United States had to wait eight long
months to find out what had happened.
The arrogant Assistant U.S. Attorney was taking advantage of his
power. He couldn’t care less about what happened to a Japanese banker, let
alone the world financial markets. While he was busy charging me for
threatening the safety of a Japanese financial institution, he would have
taken a billion dollars from Daiwa if he could. He didn’t care one iota if it
went bankrupt and hundreds of people lost their jobs and thousands lost
their deposits as a result of it paying an excessive fine. I had tried
unsuccessfully for twelve years to recoup losses for Daiwa (so that I could
keep my job) and wound up causing a significant loss. This was termed ‘a
horrendous crime’. But if the U.S. Attorney ripped off the same bank, she’d
boast that justice had been done. Over a fine meal, her staff would present
each other with numerous medals and awards. What hypocrisy!
“Let me say this to you,” I began. “I didn’t know I was going to meet
with you until ten minutes ago. You’ll have to excuse me if I don’t speak
properly, because I am currently incarcerated in an inhumane environment
you couldn’t possibly imagine, and I haven’t spoken in a civilized manner
for some time.” They acknowledged this, although they couldn’t really
grasp it. After I summarized what I had done, they began asking questions
to Figel, who would repeat them to me. His childish charade was all chest-
pounding; in fact, he drew himself up and seemed larger than before. Full of
glory, he moved with deliberation and injected a deep tone of dignity into
his voice. What a farce!
He reminded me of the Latin Kings. He had to show he had more
power. The regulators couldn’t complain as long as he said the investigation
was still continuing, when in fact there was no ongoing investigation with
regard to Daiwa’s case. Everything was done. After pulling in the largest
criminal fine ever of $340 million in a mere four months, this U.S.
Attorney’s office was not about to close the case. It was obvious that by
keeping the case open, they could continue to bill the government sizable
amounts for their expenses.
The regulators were very polite. One gentleman even drew my portrait
on his notepad and gave it to me at the end. They should have heard my
story eight months earlier and made their corrections before more damage
occurred: This was a leak that could have been plugged right away. I told
them as many details as possible so they could close the loopholes and
prevent anyone else from doing what I had done and suffering my
predicament.
George was still there in June. When he was told no prison would take
him, he knew he would be stuck in the MCC for a while. So he told the
warden to move him back down to the M-Tier. I was also moved down.
George knew the warden very well. Years ago he had been George’s case
manager, which is like a counselor. George had been in all the maximum-
security federal penitentiaries and knew quite a few officials. He was
infamous in the Bureau of Prisons. I found this out when Kathy Hawk, the
director of the BOP, visited the MCC. When the warden brought her up to
our Tier, the director walked straight to George’s cell and had the door
opened. They exchanged a few words and shook hands. ‘My goodness,’ I
thought. ‘This man is a living legend.’
Almost three weeks later, Figel pulled me out for another interview. It
was the same as before. It went into the lunch time, and everybody took a
break. A woman asked me if she could bring me something from
McDonald’s, and without hesitation I asked for a burger. It had been a long
time since anyone had been willing to do something for me while knowing
the position I was in. I was so used to being treated like a slave by Figel and
an animal by the guards, that a simple gesture of kindness warmed my
heart. After two more sessions, the interview with the regulators was
finished on July 2nd. Now I had two and half months until receiving my
sentence.
I began thinking it might be possible to get ‘time served,’ since I would
have done almost a year by then. I had not been outside in nearly ten
months, had been subjected to more than 400 strip-searches, and had spent
more than 450 hours in a semen-spattered holding cell. This year should
count for more than several years in a Club Fed playing tennis and
hobnobbing with other white-collar criminals. But as usual, Vince cautioned
me not to get my hopes up.
In June, one of the largest Japanese trading houses, Sumitomo
Corporation, announced it had suffered a $1.8 billion unauthorized trading
loss in the copper market. It was reported that a Japanese trader named
Yasuo Hamanaka, also known as Mr. Five Percent, because he had
controlled five percent of the world’s copper supply, had been hiding his
loss since 1985. Despite persistent questioning by the regulators since the
previous April, he refused to admit his culpability and disclose his web of
deceit. Although the trading vehicle used was different, he took an arduous
path nearly identical to my own.
The primary difference was that I chose to come forward. Because of
Hamanaka’s refusal to confess in a timely manner, Sumitomo ended up
losing another $800 million, for a total loss of $2.6 billion. We don’t know
how many others have traversed similar paths, only to be discovered with
minor losses, like Yamada of Daiwa Trust, or have been successful in
recouping their losses and have gone undetected.
Everybody was stunned that companies with risky speculative
operations, such as Sumitomo Corporation, hadn’t scrutinized themselves
when the Barings debacle and the Daiwa scandal broke in 1995. When
would institutions learn that it was not the trader but the lax internal control
system that allowed a small loss to mushroom into an enormous loss?
Traders are human. Human nature dictates that this sort of disaster can
occur anywhere and anytime if an organization does not have an effective
control mechanism in place. While a handful of government lawyers were
keeping the regulators away, the financial market had failed to focus on the
real problem.
One day there was a commotion on L-Tier. From the narrow slit in my
window, I saw several guards carrying a man. I later found out Murad had
tried to kill himself in his cell because he had been convicted and sentenced
to more than 100 years. Despite the little I knew of him, I felt very sad. The
man truly believed in God.
On July 12, Tsuda’s sentencing was postponed until October 4. There
was no reason whatsoever to delay it other than Figel’s agenda of keeping
the investigation alive. A few days later, I was told my sentencing would be
postponed also. Figel would not give me a date, but he indicated he would
like to postpone it into 1997. When I heard this, I felt like screaming. He
had no regard whatsoever for my life. It wouldn’t bother him a bit if I rotted
in my cell, but there was nothing I could do.
Every morning, George woke up at 5:00 a.m., cleaned his cell with a
wet rag, spread his blanket on the floor, and worked out. He did a thousand
crunches, five hundred push-ups, two hundred squats, and some stretching
exercises. He would be done by the time I awoke. We had gouged a hole
between our cells and inserted a funnel made out of a paper cup so we could
communicate clearly.
 We had sixteen hours a day to talk and talked about everything. I
translated my manuscript, and he critiqued it. Each day, the editor of my
memoir requested additions, deletions, and re-phrasings, and I would ask
George’s opinion. It was amazing how much George and my editor agreed.
He told me to state the facts but not whine. “Nobody wants to hear you
whine. A man should take whatever fate deals him. Just put down the
details and let the readers make their own judgment. Don’t beg for
sympathy.”
George was not sorry for the things he had done because they were his
‘conscious choices.’ “A man should accept the consequences of his choices
even if they aren’t what he expected,” he said. “For example, if the plane
you’re on plunges into the ocean, that’s your fate. You didn’t have to be on
it, but you made a conscious choice.”
“But we are entitled to regret the things we’ve done, aren’t we?” I
queried.
“There’s no use regretting, because what’s done is done. It’s buyer’s
remorse. If you allow yourself to regret it every time things don’t work out,
then you’re being controlled by your fate. Nothing is worse than letting fate
control your life, because things happen for reasons. We all die when we are
supposed to. No sooner or later.”
“You mean to tell me that those people on TWA Flight 800 were meant
to die?”
“Absolutely! That was their fate.”
“So being here is my fate, and I shouldn’t regret what I’ve done.”
“What good would it do? As long as you made your conscious choice,
accept the consequence as fate. Don’t judge your choice by the
consequences, because you never really know the final result.”
“What’s the final result?”
“You are in this shit-hole, thinking you made a wrong choice at some
point in your life. But your life is not over yet. If you learn to live
productively and happily from this experience, then one day you might say,
‘I didn’t make a wrong choice after all.’”
I was ambivalent about the philosophy of a man who’d been in prison
for thirty-four years, but this statement struck me as more encouraging than
anything else he had said. “So, we don’t really know the end result of
whatever choice we make until the end,” I paraphrased. “And although we
can’t change the choices we made, we can change the outcome by doing the
right thing?”
“Yes. You are given unlimited opportunities to make new choices that
could alter the outcome of your old choices.” It was incredible how he
could give me hope and illuminate the path I had followed. At 63, the
“King of Prison” still had more than 10 years to go before a possible parole,
yet he hoped to return to his wife of forty years and live the remainder of
his life as a happy man. I took hope because, by comparison, I had it made.
 Chapter 21

The Endgame
By August, I had my memoir finished. The publisher was ready to release it
immediately after my sentencing on September 16. To ensure my sentence
would not be affected by anything I wrote, the timing was crucial. The
manuscript, which contained information that had not been made public,
was sent to the press well beforehand. Sixty thousand copies were printed
and secretly stored at the printer’s warehouse. The publisher was also
worried that an attempt would be made to block its release if its existence
became known before it reached the shelves of Japan’s bookstores.
The summer heat was beating on the walls of the courthouse, but inside
the MCC, it was exactly the same all year around. Akemi had been visiting
me every week during her lunch hour. She came in snowstorms, pouring
rain, or blistering summer heat, because she knew seeing and holding her
for a few minutes gave me the strength to go on. My older son, Ben, had to
quit Colby College due to lack of funds and was going to attend Rutgers.
Ryan was admitted to Penn State.
At 5:30 a.m., I heard a guard walking around the tier asking prisoners,
“Hey, you wanna go to the roof?” There was a playground up there where
defendants on other floors took their recreation. It was a big screened-in
area, like a giant batting cage.
Eventually he reached my door: “Egooche, you wanna go to the roof?”
“It’s dark outside!” After ten months, they were going to take me
outside, but in the dark. Yet I needed to breathe real air, not the filtered
concoction that came out of the ventilator. So was chained up like Hannibal
Lecter and escorted to the roof. I was the only one there. The guard
removed all my chains, and I ran around like a dog off its leash. I jogged
around the cage until the time came to go back in. It felt great. For a few
minutes, I saw the sun rising up over Brooklyn and then I was brought back
to the hole. In less than a month, I told myself, I could bask in the sun as
much as I wanted.
The L-Tier was balanced quite well now. Four Latin Kings, Dr.
Marzook, Missonaire (Frenchie), George Harp, and me. Even the gangs had
come to accept the arrangement. Marzook was fighting extradition to Israel,
while Frenchie was fighting the U.S. Attorney. In L-Tier, we were all
friends. It was a tiny world: eight people living in a hole, with no sunlight.
Once in a while, the prison psychologist came around and asked if we
were thinking about hurting ourselves. George told us to say no because if
someone said yes, they would put him in a room with nothing. “They don’t
do anything if they don’t have to. If they do something, they are doing it to
protect their own ass, not yours.” This was one of many lessons George
taught us.
One day, the doctor brought a young intern who seemed eager to learn.
“Marzook, this is a psychologist,” she said. “Can we talk to you?” She was
polite and anxious.
“No, thank you,” Marzook replied, not even putting down the book he
was reading.
“You are not thinking about hurting yourself, are you?” she asked. She
had to get an answer so if Marzook hurt himself, the MCC could defend
itself by showing that the subject had indicated no such intention during his
counseling.
He refused to answer.
“You have to address him as Dr. Marzook, if you want his answer,” I
told the girl. She smiled and asked if I was thinking of hurting myself or
had any psychological problems. I said, “What do you think? I have not
harmed anyone in my life, but I have been locked behind this thick metal
door in a roach-infested cell for ten months and treated by the guards like
some kind of animal. I have not felt the sun warm my skin so long it has
become like a snake’s. What makes you think I might want to hurt myself?”
She was stunned for a second and then asked calmly, “But are you thinking
about hurting yourself?”
“No.” I knew the answer she needed to move on to the next guy.
“Thank you,” she said, with a smile. She would make a good BOP
psychologist.
With my final manuscript at the publisher’s, I concentrated on my book
about George’s tumultuous life. Labeled as one of the founders of
America’s most ruthless prison gang, he was a good subject. During the
month I had spent with him, I asked him to write a rough memoir. He began
setting down his life, sending five pages at a time to me through the hole. In
three weeks, I had three hundred pages of his hand-written composition. I
sent them to Akemi, who had my sons type them to use as a base
manuscript. This was my project for the remainder of my time.
George was fiercely loyal to his friends and merciless to his enemies.
He also loved animals. One day, the guard distributed mouse traps (pads
with a sticky surface). I felt bad for George because he had adopted a
family of mice as his pets. Personally I didn’t care for them because they
chewed holes in my snacks at night. But since he liked them, I just ran them
off when I saw them in my cell. In one night, thirteen mice were caught. Dr.
Marzook was happy to have trapped four. I felt bad when I saw George
watching as Marzook showed off four dead mice. Just two days before,
George had told me how shiny their coats were getting because he’d been
feeding them cheese he had made. Marzook had taught us how to make it
from rotten milk. We got a pint at each meal. Keeping it for several days
made it turn into jelly. We put it in a pillowcase and squeezed the liquid out
and let the residue dry.
I had a grand time making cheese in my cell.
At the end of August, Figel went on vacation for two weeks to Europe
with his girlfriend while I sat in my dark hole. When he came back
refreshed, he postponed my sentencing date to October 28. On the 4th,
Tsuda’s sentencing was postponed to October 17. He must have felt the
same frustration, but at least he was home with his wife eating good food.
According to his offense level, he was looking at one year in prison. With a
5K1.1 letter, he might receive only probation. On the 17th, his sentencing
was postponed to the 25th. This would give Figel an excuse to postpone
mine again. What he said was that at the request of the Fed, Arthur
Andersen, the prominent auditing firm, was preparing a summary report of
Daiwa based on their audit, and until the report was done, he wasn’t
comfortable giving me the 5K1.1. The Andersen auditors left for Japan in
September and were scheduled to have the report ready by the end of
October. However, legally speaking, whatever Andersen’s finding showed
was irrelevant to my sentence.
I was fed up. Somebody had to stop his arrogant political maneuvers.
What he was doing was too obvious. The U.S. Attorney’s office wanted to
keep the Daiwa case alive as long as possible in order to either pull more
expenses from the government’s coffer or to jack up next year’s budget. To
achieve this end, he needed to keep me in the MCC. Once I was sentenced,
I would be out of his control. Until then, I was his slave—or more like a
hen laying golden eggs for him.
Figel was more manipulative than any of the guys on my tier. He would
exploit others for his own gain. It was a joke that he was prosecuting Tsuda;
I had no doubt that Tsuda was a more righteous man than Figel, who was
only thinking about his own rewards. In the meantime, I was getting
weaker. I had weighed 160 lbs. going in the previous October, but now I
was down to 142. My legs had atrophied from not walking. I tried to pace
up and down the twenty-foot tier, but that didn’t do much to maintain my
leg muscles. I wondered what damage was accumulating from lack of
sunshine.
I began writing a letter to the judge, complaining about what the U.S.
Attorney was doing. I didn’t want to bad-mouth the government, but I had
already lived up to my part of the bargain. Spending an extra nine months in
this dungeon was not part of the deal. When I finished it, I showed it to
George.
“Tosh, this is a good letter, but I wouldn’t send it.”
“Why not? If I don’t, how will he know about the game Figel is
playing?”
“Take him in front of the judge. Unless he hears both sides, he won’t be
able to make a decision anyway.”
“Can I do that? I mean, won’t Figel retaliate and refuse to give me the
5K1.1 letter?”
“Look, as it is, he can claim the investigation isn’t over, and you’ll have
to continue helping him until he says different. For that matter, he could
keep you in the hole for the next five years. But the judge won’t let that
happen. It’s his case as much as Figel’s.”
George was right. I asked Vince to set up a court appearance in front of
the judge. On October 24, we had our day. Vince told the judge I had
assisted the government to convict Daiwa and Tsuda and had answered all
the questions from the banking and financial regulators. He explained that I
had done all I was asked and my contribution to the government had been
unprecedented.
I stood up and said, “I’ve done everything requested of me, without
hesitation or reservation. While assisting the government, I had to spend
400 hours in a tiny holding cell, was subjected to hundreds of demeaning
strip-searches, and have been held in unhealthy conditions with some of the
most notorious criminals in the world. Your honor, my work is done, and I
should be sentenced. I would accept whatever punishment you impose, but I
shouldn’t have to take this unnecessary abuse. It has been unbearably hard
for me to be incarcerated in these conditions, but I was able to bear it
because there was a definite end date. But the way Mr. Figel has been
continually postponing the sentencing; I simply cannot go on without
knowing when this will end. It is so hard for me and for all those who love
me not to know….” At this point I broke down and cried. I was glad there
were no media people in the courtroom. I felt like a wanderer in a desert,
walking toward a distant oasis: Three times a devil changed the water to a
mirage when I came near. Now he was trying to take back his promise
again. How cold, how calculating and uncaring, could a man be? And this
one worked for the so-called Justice Department.
The judge told Figel, “I don’t know what you are trying to do. But many
lives have been put on hold because of you. If you are not ready to submit a
5K1.1 letter, I will sentence this man without it. This court will give you
until December 15. The sentencing will be held on December 16, 1996,
with or without the government.”
He tried to talk to the judge on the side, saying he had a reason for this,
but the judge told him his words were final. Yes! Finally, justice was done.
Although I had hoped the judge would sentence me on October 28, at least I
had a fixed date. December 16, fifty six more days.
In addition to Andersen’s report, there was another excuse Figel used to
postpone my sentencing which was a meaningless, time-wasting
proceeding: the grand jury indictment of Yagi and Araki. He said he
couldn’t agree to sentencing me because I was to be a witness in this. The
fact that he hadn’t done this a year ago when he indicted Daiwa and Tsuda
showed it to be a mockery. Besides, Yagi and Araki were in Japan.
Anybody could see this was a concocted excuse, and the judge put an end to
it. So Figel grudgingly scheduled my grand jury testimony for December
11, five days before my sentencing.
George was happy I finally had a solid date. Unfortunately, he hadn’t
heard from anyone in the BOP about a prison to take him. Because he was
considered ‘marked for death’ by the AB, he was not supposed to be put in
a Federal penitentiary. They were looking for a state prison to take him, but
none would. He wrote to several, as if he were sending out a resume for a
job. If one accepted him, he would tell the BOP to make the financial
arrangements. In these placements, it paid the state $50 a day. It looked like
I would leave the MCC before him.
On October 28, Tsuda was sentenced to two months in prison and a
$100,000 fine. I could feel how devastated he was. The judge had to send
him to prison to show the world what happened to those who broke
American law, regardless of how insignificant, and even if they were
following the orders of their own government. By putting Tsuda in prison,
the Justice Department sent a message to the MOF: “Hey, you may be
above the law in Japan, but not here.” Nevertheless, my heart went out to
his family because he had a daughter who was to be married soon, but when
a member of a family becomes a felon, especially the father of the bride, the
ceremony was invariably canceled.
King Ponce and King Wooly were also sentenced. They received twenty
years each. They had weak positions because the government had enough
rats already and had kept them just in case. In the end, they weren’t needed.
King Ponce was only 20 years old. He had killed another boy when he was
17 and set fire to a building, under orders from the supreme King. Since I
came to the tier, he had become a Christian and married a girl who had
borne his child. The MCC held a small ceremony for them. He was hoping
the government would use him so he could get out in eight years like King
Cobra, but it didn’t work out. As some of these guys were getting their time
cut in half for ratting on another guy, my hope for a sentence of ‘time
served’ grew larger.
Another Thanksgiving Day was upon us. We had a Cornish hen as the
main course and a pumpkin pie for dessert. With a six-inch concrete wall
between us, George and I shared a very pleasant dinner as if the wall were
not there. We talked about the old days, how I had cooked a large turkey for
my kids. One year, we all went to the Village and had dinner at ‘One If By
Land’ on Barrow Street.
George didn’t have many memories of being in a restaurant, but was
interested in hearing mine. His world had been behind walls for most of his
adult life. He had robbed banks in his youth, but the bulk of time he had
served was because of what he had done in prison. His original sentence in
California was for only five years. But he had been swept up in the tide of
race wars in the 1960s and became part of a white prison gang. The rest was
history.
 I liked the holidays because nothing moved in the jail. When the Federal
government was closed, the jail was also closed. We were left alone, except
for lunch and dinner. On holidays, the LKs were depressed and slept all day,
letting the older generation have some quiet time to reflect on life. George
and I sat by the window, a rare ray of indirect sunshine coming into our
cells, a reflection from the window of another building.
It was so peaceful. I told George, who was reading a book in the sun,
“You know what, George? Sitting here, thinking about all those days filled
with fear and guilt, I feel so alive and hopeful.”
“Tosh, you’ve been through hell for thirteen years,” he replied. “Now
your new life is about to begin. That’s why you’re feeling that way. I really
hope you get out soon, because you deserve it.”
“Well, I won’t kill myself if I don’t,” I said. “I can do a few more
months if I have to. It’s not just me, you know. I’m doing this to rebuild my
life with Akemi.”
“I know. She’s a good woman.”
On November 25, Arthur Andersen handed in its audit report on Daiwa
Bank, confirming that everything I said was true. On December 11, a mock
grand jury met at the old courthouse to indict Yagi and Araki. There were
bleachers for the jury and a ten-foot long table in the middle of the room.
Figel and I sat at the ends of the table, with two women in the middle. One
of them was white and the other was black. The latter one told me to raise
my right hand.
The jury didn’t seem happy to be there, but Figel tried to get their
attention by mentioning that this was part of the billion dollar scandal at
Daiwa. Naturally, he didn’t say why we were a year late. When he told me
to, I began reciting my life story. About halfway through, one of the older
jury members started to snore. I had told it so often that by this time, it
bored me, too.
On the 16th, I put my belongings in a box and told the guard to give it
to George if I didn’t return. I bid farewell to Marzook and Frenchie. They
were facing difficult times ahead, but for what it was worth I wished them
‘good luck.’ They had been helpful to me.
In the holding cell at the R&D, I changed into my dark suit. From the
notches on my belt, I knew I’d lost a good deal of weight. The chance of
receiving time served was 50%. I wanted to remember what this place was
like. Once I left, I hoped to never see it again.
 Entering the courtroom, I saw Akemi and Ryan seated in the front. I
also saw Len Joy and Ed Stroz, and several reporters. Vince and I sat
behind the team of U.S. Attorneys, headed by Figel. The moment of truth
had finally come.
Before any sentencing, the Probation Department submits a document
called a ‘Pre-sentence Report’ to the judge. This is essentially an objective
interpretation of the sentencing guidelines. In the case of a plea agreement,
the government and the defendant must agree on the offense level before
they go in front of the judge. The Probation Department figured the level
should be 29, which called for 7 to 9 years imprisonment and no fines. We
agreed.
The judge entered the courtroom dressed in a black robe. I looked at
him; the man who held the key to my future. As powerful as Figel was, he
was more so. The only thing limiting the extent of his power was the
Federal sentencing guidelines. He would render his sentence after hearing
from Figel, Vince, and me. I felt anything we said at this point was
academic. The judge had already made up his mind. Having the 5K1.1
motion from the government in his hands, his decision was no longer bound
by the guidelines. It should be a relatively simple process.
But the judge wanted to raise the offense level by three because of the
degree of loss. Although the guidelines required additional offense levels
for incremental increases of loss, the largest was ‘more than $80 million.’
Even though this was the highest amount in the fraud table, the judge took it
upon himself to set a precedent for calculating penalties for greater
amounts. Although Vince, as well as the government, reiterated that they
saw no justification in raising the offense level, the judge declared, “It may
well be that we will wind up in the same place.” What he meant was that
although the new offense level of 32 called for 10 to 12 years of
imprisonment, after the downward departure based on the 5K1.1, the end
result could be the same. I didn’t know what to think. All I knew was that
no one before me had ever provided more valuable, complete, and timely
assistance to the Justice Department.
It was the moment for Figel to honor his end of the bargain. I listened
intently to make sure he would not abbreviate the amount of assistance I
had supplied. “Obviously, Mr. Iguchi stands before this court having
committed very serious crimes,” he began. “He is responsible for an
astounding $1.1 billion loss. His crimes were highly sophisticated. They
involved multiple criminal acts, including forgery, falsification of the
bank’s books and records, and the unauthorized use of the bank’s
customer’s securities. These crimes, in their enormity, threatened to
destabilize the Japanese banking system and in turn, the world banking
system.
“The cover-up portion of Mr. Iguchi’s crimes, to which he pled guilty,
represented a direct assault on the primacy of United States laws over the
operations of foreign banks doing business here. The amount of the loss
significantly impaired Daiwa’s regulatory capital. As a result, we can’t
understate the seriousness of Mr. Iguchi’s crime. Simply put, it’s one of the
more substantial financial crimes in history.
“Nothing the government says beyond this point, your Honor, is meant
in any way to diminish the gravity of Mr. Iguchi’s crimes or to suggest we
do not take them very seriously. But from our perspective, his ultimate
decision to cooperate and the extraordinary assistance he has provided are
of equal significance. Initially, Mr. Iguchi confessed his crime not to the
government, but to the bank, but neither the bank, the bank auditors, nor
federal regulators were able to discover Mr. Iguchi’s crimes. It was Mr.
Iguchi himself, and the burdens under which he was suffering, that caused
these crimes to come to light.
“Mr. Iguchi has provided extraordinary cooperation to the government.
With most crimes, but particularly with white-collar crimes, it is very
difficult to investigate and prosecute without the assistance of a cooperator.
That is, to separate legitimate from illegitimate transactions, particularly in
a bank the size of Daiwa, where every piece of evidence has the appearance
of legitimacy, is extremely difficult. Determining when a crime has been
committed and when it’s a routine business transaction is very difficult
indeed.
“This case, your Honor, was obviously on a level of complexity far
beyond that which we face in most white-collar crimes, not just because of
the sheer size of the bank, but the difficulty in discovering Mr. Iguchi’s and
the bank’s illegal conduct in the cover-up phase. Evidence of the cover-up
was hidden among the normal billions of dollars of composite withdrawals,
wire transfers, and transactions of this nature. Compounded with those
types of investigatory problem were language and cultural differences that
without Mr. Iguchi’s cooperation would have made this case exceptionally
difficult for us to investigate and prosecute.
 “I should emphasize that while the bank has never cooperated in this
investigation, that Mr. Iguchi has. With Mr. Iguchi’s assistance, the
government was able to act decisively and quickly to investigate his crimes,
obtain relevant evidence, and investigate the separate crimes of the bank
and its management. With respect to the bank, this was accomplished in six
weeks—a remarkable feat, given the extent and sophistication of the
crimes.
“Cooperation is of great importance to the government’s law
enforcement effort. Mr. Iguchi’s cooperation helped not only the FBI and
the U.S. Attorney’s office, but the Federal Reserve Board, the Federal
Deposit Insurance Corporation, the New York State Banking Department,
the Commodity Futures Trading Association and the Chicago Board of
Trade unravel the complex facts that he left in the wake of his crimes.
“More importantly from our perspective, his cooperation allowed the
government to send the message that we will deal forcefully and
aggressively with these crimes, crimes which threaten the integrity and
stability of the national and international banking community and the ability
of state and federal regulators to protect this nation’s financial markets.
“It’s exceedingly important to the government and to law enforcement
generally that cooperation be rewarded. Mr. Iguchi has provided extremely
valuable cooperation, and we have, therefore, filed a motion pursuant to
5K.1 seeking a departure from the sentencing guidelines, and we
respectfully submit that Mr. Iguchi’s extraordinary cooperation be rewarded
with a substantial reduction in the sentence he would otherwise face.”
It was virtually the same language he used in the 5K.1 motion. Now it
was the turn for my defense lawyer: “Your Honor, I ask the court for a time-
served sentence in this case, which effectively would be an 18-month
sentence. Mr. Iguchi was never motivated by greed. He never engaged in
unauthorized trading for personal gain. What motivated him, your Honor,
was the misguided attempt to recoup his earlier losses, to climb out of the
hole he had dug. And also what motivated him, frankly, was a desire to save
face. In fact, your Honor, by coming to work every day, by keeping detailed
records of what he had done over the years, which was truly remarkable—
and the 5K.1 letter speaks about that—by not using his ‘key to the vault’ to
make himself a millionaire many times over, and by not fleeing the country
or otherwise making himself scarce, Toshihide Iguchi did what he felt had
to be done to minimize the harm to the bank and its customers.
 “He knew his day of reckoning would come, and he never walked away
from his responsibility to face up to the consequences of his actions. One
other fact I think deems emphasis here, your Honor, is that, as Mr. Figel
pointed out, Mr. Iguchi’s crimes came to light only because he revealed
them. They were not uncovered by law enforcement or regulatory agencies
or the bank itself or the bank’s auditors. Toshihide Iguchi confessed to the
crimes he committed. Thereafter, he did everything in his power to provide
the bank with the information it needed to make an informed judgment
about what actions to take.
“Everything Mr. Iguchi has done since he has confessed shows how
totally and absolutely remorseful he is for what he did over the past decade,
and I should point out here, your Honor, that remorse in this case is not
something that came about as a result of getting caught or being punished.
The Probation Department talks about general deterrence as being the
principal factor the court should consider in setting the final sentence, to
send a message to other people who might be inclined to do similar acts.
But by the same token, if the court is inclined to send a message, then
another message it should send is to people who might be inclined to
voluntarily confess and voluntarily cooperate. That message is equally
important: If you do so, you will be treated with respect and you will
receive, in effect, a reward for cooperating and for confessing: a substantial
reduction of your ultimate sentence.
“It’s important for the court to know that Mr. Iguchi began cooperating
the moment he was confronted by FBI agents at his home on a Saturday
afternoon. He didn’t ask for a lawyer. He immediately started talking to the
agents. He accompanied them to a motel for privacy and, your Honor, he
never returned home. That was the last time he saw his house. That house is
being forfeited as part of the sentence in this case.
“Mr. Iguchi is genuinely remorseful. He confessed to escape the
burdens of his concealment and face the consequences of his actions and
begin a new life—not because he was caught or punished. His life history is
one of law-abiding and ethical behavior. There has never been any sign of
criminality, immorality, or misconduct in his past. He is an excellent father
to two sons. There is also no question that this is a man of great personal
responsibility and accountability. Mr. Iguchi is someone who never walked
away in his lifetime and has not walked away from his responsibilities.
 “He is now penniless. His worldwide notoriety will make it impossible
for him to ever resume the life that he had or anything close to a normal
life, because he is, in fact, a person of great notoriety. The court should note
that the Japanese media, or at least some persons in the Japanese media,
have branded Mr. Iguchi a traitor for cooperating with the U.S. authorities
in this case.
“And, finally, your Honor, he has spent 15 months in custody, and 14 of
those months have been in administrative lock-down at the MCC, where he
lived in a 7 foot by 8 foot cell. He hasn’t been outside for more than a year.
He has been threatened and intimidated by other inmates. He has been
subjected to hundreds of strip-searches. I submit that the shame and
humiliation that Mr. Iguchi’s confinement brought upon him has been, in
fact, unfathomably severe for a person of his background and life
experience, and it ought to be taken into account by this court.
“So in conclusion, your Honor, in light of the unique circumstances of
this case and in light of the extraordinary nature and extent of his
cooperation, and in light of the severe punishment he has already suffered
and will continue to suffer in the future, I ask the court to sentence Mr.
Iguchi to time served.”
He spoke well. Although there were several erroneous assumptions, I
couldn’t have said it better. Now it was my turn to make a statement. I had
prepared it the night before and practiced it with George several times. He
actually gave me tips: “Don’t think what you say will make any difference
to your sentence. By the time it’s your turn to speak, the judge’s mind will
be made up. So say what you want to, from your heart.” When I recited my
speech, he liked it. I trusted his opinion more than any other because he had
no self-interest in anything I did.
The judge said, “Mr. Iguchi, it’s your right to make a statement now on
your own behalf. If there is anything you would like to say, I would be
pleased to listen.”
I rose and addressed him: “Your Honor, when I decided to cooperate
with the government within hours of my arrest, Mr. Figel told me to do the
right thing. Because I had no way of knowing the specific nature of the
government’s probe at that time, I interpreted ‘do the right thing’ to be to
cooperate with the government. For many years, however, being the one
who caused this tremendous loss to the bank, I always thought the right
thing for me to do was to inform the senior management confidentially of
the incident, along with relevant facts, so they could take the necessary
steps to avert any further loss or damage to the bank. And that is exactly
what I did.
“Based on the complete and truthful statement and the information I
provided to the government during the following three weeks with respect
to past actions of the management, Daiwa Bank was ordered out of the U.S.
and indicted by a grand jury, and this indictment, as the court is well aware,
resulted in their conviction and the imposition of a $340 million fine.
“Feeling rather ambivalent of this outcome, I began to ask myself what
it really means to ‘do the right thing,’ because I became very confused
when I examined it in terms of moral, ethical, and legal considerations. Was
I to assist the bank all the way to prevent it from suffering further losses, or
was I to assist the government in its probe, regardless of the consequences
to the bank? Or was I just to do whatever it took to ameliorate my position?
None of these seemed to be the right answer.
“After much soul-searching and taking a hint from Mr. Figel’s
uncompromising demeanor in pursuit of the truth, I finally came to the
conclusion that the thing to do in any situation or under any circumstance,
regardless of the consequence, is to tell the truth at all costs. As I stated in
my allocution, your Honor, I had to live a life filled with fear and guilt and
uncertainty for 12 years because I failed to do the right thing when I
initially lost $70,000, and the further I went down the wrong road, the
harder it got to get out. But over the years, I have learned that it takes
enormous amounts of strength and courage to live a life of total honesty,
and I also learned that such a life is the only life worth living.
“Your Honor, at this point, my life is still very uncertain in many
respects, but one thing I am certain of is that I no longer have any fear or
guilt because I think I have finally done the right thing.”
Looking back on those days filled with deception and lies, I was
overwhelmed by how much agony I had endured to avoid facing the truth.
These two sources of anguish are inherently different. One results from an
act of cowardice, the other from an act of courage. While I had been trying
to conceal the truth, I had suffered enormous pain. But it was not the pain of
facing the truth. It was a pain arising from my conscience. By lying to my
parents, lying to my friends and colleagues, and lying to the world, the
moral fiber of my body was torn apart and my self-esteem was shattered.
That produced a pain that would not go away until I accepted the truth
about myself. Although the previous fifteen months had been difficult, I
was able to endure because nothing more than physical hardship was
involved. While I lay on a concrete floor stained with urine and semen, I
was well on my way to restoring my moral fiber and my sense of self-
worth.
Had I been caught red-handed or fleeing from the scene, the ensuing
punishment would have been more devastating. But I was proud of myself
for doing the right thing in the end. And I wanted to share the lessons I had
learned from my ordeal with the world.
Now it was time for my sentencing. The judge cleared his throat and
began: “I agree with a great deal that has been said already here this
afternoon by all three who have spoken. There is no question that this was a
crime of historical dimensions and potentially world-shattering
implications. It threatened the stability of an enormous bank in a world
economy that today is so complex and interdependent that the degree of that
complexity and interdependence is probably quite literally beyond human
comprehension.
“If we are not to stare into an abyss some day, it will be because of the
integrity and the stability of the enormous institutions around the world,
public and private, that alone are responsible for the smooth functioning of
this gigantic system. So it really is not at all inaccurate or hyperbolic to say
that what you did, Mr. Iguchi, however it started, and why ever it continued,
threatened the well-being of uncountable people all over the world.
“The tragedy of it all is almost as incomprehensible. I fully accept that
what you did here was not principally motivated by greed, and to whatever
extent I can trust my own insight into it, I am well inclined to believe that
the theft of $570,000 was reflective of panic rather than venality.
“I made a note to myself last night of the analogy that Mr. Briccetti used
a few minutes ago, and I think it’s entirely apt. What happened here was
essentially the same thing that happens when an uncontrolled gambler loses
everything that he or she values in life at the gaming tables or the racetrack.
“This crime began in 1983 when you lost, as you said a moment ago,
$70,000. That would have been the extent of it if you’d had the courage to
acknowledge what had happened and face the consequences. Rather than
doing that, you covered up the loss and tried desperately to recoup it with
one more roll of the dice, one more trade. But, unfortunately, you were
neither good at it nor lucky, and the market moved against you over and
over and over again. So the losses and the scheme and the complexity of
what it took to cover up that exploding disaster grew exponentially for
years.
“I have not the slightest doubt that your existence for the past 13 years
has been a living hell. I can well understand that you felt chained to your
desk for fear that even the briefest absence could result in the exposure of
what was going on. Your marriage was destroyed. You have suffered the
torment of the damned, and to say, as Mr. Briccetti has, that you are
remorseful and that you have been remorseful for years doesn’t do justice to
the state of mind that I at least think you bring here today and have walked
around with for longer than I can imagine most human beings doing.
“Nevertheless, I am obligated under the Sentencing Reform Act to
consider not only those factors but others. I am obligated to consider the
nature and circumstances of the offense, as well as your history and your
character. I am obligated to reflect the seriousness of the offense in the
sentence, to impose a sentence that promotes respect for law and provides
just punishment, and in this case, perhaps most importantly, provides
adequate deterrence to criminal conduct.
“Now, the government has moved for a downward departure on the
basis of your assistance. I intend to do so. The guidelines range, given my
computation, is 121 to 151 months of imprisonment. In deciding the extent
to which to depart downward, I considered the importance of your
assistance and the government’s evaluation of it, and that importance has
been very great. I considered the truthfulness and completeness and
reliability of your cooperation, and the information you provided, all of
which has been exemplary. I considered the cost to you of cooperation,
which in this case includes the fact that at least to substantial segments of
opinion in your native county you are, as Mr. Briceetti indicated, a pariah. I
considered also the timeliness of the cooperation.
“As I weigh all of these factors, the ones that seem to me of greatest
significance are three. The first is that I would not be doing what I am here
to do if this sentence didn’t send a message to others in a position to do the
kind of harm that you did and threatened to do. Those who are entrusted
with the ability to threaten the great institutions on which the world depends
must know that even the most extensive and the most valuable cooperation,
which will be given appropriate recognition, will not earn what anyone
could rightly regard as a slap on the wrist if they succumb to a temptation to
engage in activities of this kind.
“With respect to the nature and timeliness of your cooperation, to which
I attach a great deal of significance, and which has been absolutely
unstinting, according to the information provided to me since the day you
were arrested, I think one point should be recognized.
“In July 1995 you did, as you say, Mr. Iguchi, write a letter to the senior
management of Daiwa Bank confessing what had been going on for 12
years. In that letter, and subsequent communications, if I remember the later
communications correctly, you urged concealment of the bank’s losses,
concealment of your own crimes from U.S. authorities, and counseled the
bank as to how it might reorganize its affairs in a manner that would escape
U.S. regulatory authority and for a period, a brief period, but a period
nonetheless, you participated in the bank’s efforts to delay disclosure and
otherwise fail to conform to its responsibilities under American law.
“As exemplary as your cooperation and remorse is the fact that they
have limits. You set limits on them. They were limits imposed by misguided
loyalty to your employer in circumstances where it was not warranted.
“The third factor I want to make note of is the financial hardship to you
at this point. I haven’t any doubt at all that your future earning power has
probably, though perhaps not certainly, been limited very substantially. The
great bulk of your personal assets will be forfeited to the government. You
will have a tax liability to the government of about $200,000. I think that is
entitled to some weight too, particularly in the setting of a fine and in
dealing with restitution.
“So far as the fine is concerned, my chief concerns are deterrence and to
avoid the possibility that in a world driven by notoriety, however derived,
the opportunity for financial gain is remarkably enormous. So I intend to
impose the maximum fine of two million dollars. (The purpose of this fine
was to discourage me from writing a book for profit.)
“There is also the matter of restitution. I am authorized to order
restitution to any victim of the offense. I accept that Daiwa Bank is a victim
within the technical meaning of the statute, so in considering Daiwa Bank’s
application for restitution, which speaks in generalities of millions of
dollars, I have considered the statutory factors of your own financial
resources, actual and prospective, your needs and earning ability and the
needs of your dependents, and, as the statute says, any other factors
considered relevant by the court. Daiwa Bank sustained two losses in this
case, the $570,000 you stole and the $1.1 billion that you lost of its money.
“You will have virtually no assets after the forfeiture and the payment of
the tax liability. You have been subjected to a substantial fine. For those
reasons alone, I would limit the order of restitution to $570,000. I also think
it appropriate, however, to comment on Daiwa’s own actions, because I
think they are relevant to the extent to which restitution might be granted if
the circumstances were thought to dictate going beyond $570,000. Daiwa
has manifested extraordinary culpability both with respect to your scheme,
Mr. Iguchi, and otherwise. As has been noted, it is, before the court, a
convicted felon. It has paid the largest criminal fine in history. All of that is
detailed in the record before Judge Wood, and I need not repeat it.
“I say only for present purposes that Daiwa Bank acted with exceptional
contempt for U.S. law and U.S. regulatory authority. It has refused to
cooperate with U.S. authorities to this date. It has little claim on the
sympathies of the American court.
“Furthermore, there is an irony in imposing the fine Daiwa agreed to
pay in satisfaction of its criminal liability in the United States on Mr.
Iguchi, who for the most part, was doing his best to protect the bank from
the disaster his actions had created for it in the first place. In consequence,
even if I were otherwise in a position to impose an order of restitution going
beyond $570,000, which I do not regard as appropriate independent of
Daiwa’s actions, I would decline to do so.
“Taking all of these factors, as well as others prescribed by the statute
and the sentencing guidelines, into consideration, the sentence I intend to
impose is 48 months imprisonment, 5 years of supervised release, a fine of
$2 million, restitution to Daiwa Bank of $566,000, a special assessment of
$300, and an order of forfeiture in the form proposed by the government.”
When I heard “48 months,” I saw a steel door shutting before my eyes.
A 48-month sentence was no different from 20 years because it precluded
my new life with Akemi. The judge could take away four years from my
life, but not Akemi’s. As I slogged out of the courtroom, I glanced at Akemi
and shook my head. She looked sad but gave me an obligatory smile. Ryan
just stared at me, as if he were watching a dead man walk away.
 Chapter 22

Club Fed
I put on my prison garb in the marshal’s cell and was moved to a holding
cell in the basement. The marshal left without removing my handcuffs.
Enraged, I banged the concrete wall with my fists. It was nearly six in
the evening. I had never felt this much anger in my life. I kicked the wall
until my feet bled. After a couple of hours, I began banging on the front
grill. These cells had a steel grate three feet inside the metal door so no one
could reach the door to look out. I wanted to get back to my cell in the
MCC so I could call Akemi and apologize for dragging her into this mess.
But no one came.
I had no idea where the marshals were. If I didn’t get back by 8:00 p.m.,
I couldn’t call her, and she would have to go to sleep without talking to me.
The marshal finally came and took me back through the underground
path. When I reached the MCC, they strip-searched me and put me in their
holding cell. I looked at the clock on the R&D wall: 8:40. I was kept there
for another hour, and it was 10:00 when I got back to my cell. As I walked
into the tier, they were all standing by their windows. Mazook told me he
heard the news on the radio. Frenchie looked at me and curled his lips. The
guard asked if I still wanted dinner. I said, “No, I don’t think I will have any
appetite for a couple of days.”
I sat on the bed thinking about Akemi and what I was going to do.
“Damn, Tosh, I am sorry it didn’t work out,” George said. He waited for
me to respond. I thought I had seen the lowest point of my life when I was
first thrown into the MCC, but I was wrong. This was a lower low. God was
testing me to see if I would break. And now, at the lowest point in my life,
only one person in the world could understand the pain I was feeling:
George. I told him I wasn’t sure I had done the right thing after all.
“I don’t blame you for doubting it,” he said. “I’ve never seen anyone
who tried so hard to do the right thing.”
“Yeah, but what’s the sense if it doesn’t work?”
“Look, Tosh. For what it’s worth, you know you did the right thing and
that’s what’s important. I know how hard it is for you to accept the outcome
at this point, but one day you’ll be glad you did.”
“One day? When?”
“Not too long from now. And I’m not just saying this to pacify you. I’ve
been down this road many times. You could have fled with millions to
another country. If you hadn’t confessed, and had thrown out all the
records, they would have made you a much better offer. Or you could have
made a deal with the bank and have millions waiting when you got out. But
had you done that, you would never be proud of yourself. What you’ve
done, you’ve done for your redemption, not for less punishment.”
“Yeah, but you know I needed to redeem myself for Akemi, and there is
no way I can ask her to wait another two and a half years.”
“Tosh, my wife has been waiting for me for thirty-four years. Although
Akemi may have more at stake than Barbara did, I think she has more to
lose than to gain by leaving you.”
“I don’t know. Why do you think the judge gave me such a stiff
sentence?”
“Who knows. I told you from the beginning, they’ve got their own
agenda. When a case is as big as this one, he has a lot to consider besides
you. Look, your bank was hit with the biggest fine in history and was
closed down. If their punishment was out of proportion to the nature of their
crime, as you said, the government had to hide it by cracking down on
everyone. It was political, man. Plus, this was their long-awaited
opportunity to smash Japanese financial aggression. You just got caught up
in that.”
“I know. This was the first real violation of U.S. law committed by a
Japanese bank, and with the MOF involved as well, they had to seize the
opportunity.”
“And I hate to tell you, but you’re the one who started the mess.”
“Are you saying it made no difference how much I contributed and
suffered during the last fifteen months?”
“Pretty much. Your judge chose to send a message to deter crime rather
than reward cooperation. Who knows who he thinks he made happy.”
“So they used me again, as a messenger. What do I get for that?”
“Tosh, I’ve seen hundreds of guys used and abused and thrown to the
dogs at the end. I didn’t wanna tell you that before because I thought your
case might be different. But look at it this way. You didn’t lower yourself to
their level. You stayed focused on your redemption. You can walk away
clean, but their hands will always be dirty.”
As usual, talking to George calmed me down. The next day I was
brought to Figel’s office, where he said, “I’m sorry the judge gave you more
than I expected.” As if he cared.
What he thought no longer mattered. I’d been careful not to step on his
toes since he warned me that insubordination could weaken his 5K1.1 letter.
My self-control broke down, and anger towards him gushed out. I went into
the other room where the investigators were sitting around and told them I
felt I’d been screwed. They shrugged, unable to argue.
I called Akemi at work and asked how she was. She sounded calm.
Once again, I apologized for dragging her into this, for the harsh sentence,
and for not being able to give her what she deserved. I told her to do what
she had to, without thinking about me.
“Tosh, I was really sad yesterday thinking about you. You must have
been devastated.”
“I was, but George helped me calm my nerves.”
“I cried for hours. Then I thought about what I should do. Or what I
wanted to do.” Afraid to hear this, I stiffened up. “You know, we’ve
survived fifteen months together,” she said. “We can do thirty more. Tosh,
let’s fight this together. I know one day we’ll be able to put it behind us.” I
was ecstatic to hear this. Her love permeated through my entire body and
energized my desire to live. Since the moment I had heard the judge say 48
months, I had been battling depression and anger, but what she said brought
me back to an even keel.
“Thank you. You have no idea how happy you make me. I promise to
come back and make you proud of me.”
“I am already proud of you, Tosh. Let’s just take this thing one day at a
time.” Two and a half years seemed very long, but I had to remember it
would be much harder for her than for me.
I had no idea when and to where I would be moved. George told me the
BOP usually didn’t move inmates around after mid-December. It was a
precarious time. I decided to spend my remaining few days in the MCC
talking to George, Marzook, and Frenchie. My book, titled The Confession,
was to be published in Japan on January 17, 1997. The truth would finally
come out. In the meantime, another Christmas was upon us, and a New
Year’s Day. I told George how we celebrated it in Japan. He had an
insatiable appetite for knowledge. I promised to take him to Japan one day
and show him around.
Akemi went back during the holidays to tell my family what had
happened and to assure them she would take care of me. My mother was
worried to death that if Akemi decided to leave me, there would be nobody
in this country to look after me.
A month after my sentencing, I was still in the MCC. No one told me
anything. My publisher sent me a copy of my book, which would come out
in two days. It was exciting to see it. At about 4:00 a.m. on January 17,
1997, a guard shone a light on my face and said, “Egooche, pack up!” As
usual, I replied, “Where am I going?” As usual, his answer was, “Pack up!”
I was sure this would be the move. I was getting so comfortable in the hole
that I actually dreaded leaving. “I guess it’s time, huh?” George said,
waking.
“Yeah, I guess so. I just wish these people would tell me where I’m
going.”
“Tosh, remember, wherever you go, hold your ground, mind your own
business, and don’t expect anything from the BOP.”
“I got you.”
When I finished wrapping my meager belongings, the guard came back,
cuffed me, and opened my door. As I walked out, I stopped in front of
George’s cell. He was standing there with a big smile.
“George, thanks for everything, man. It’s been great knowing you. I’ll
let you know when ‘your’ book (King of Prison) hits the bookstores in
Japan. Be good, and so long.”
“Yeah, you too. Remember, what doesn’t kill you will make you
stronger.”
It was an emotional farewell. I had never been this close to another man.
I wasn’t sure I could have survived without him. He taught me a lot about
life. In fact, I learned much in this hellish place. I would always treasure the
experience. With handcuffs now in front, I walked down to a large bus in
the sally port. I was the only one on it. When I asked the driver where I was
going, he said, “Shut up and sit.”
We drove to the Brooklyn MDC, picked up three inmates, and headed
out to New Jersey. Snow began falling as we drove up Route 17. Out of the
window, I saw the Garden State Mall, where I had often taken my kids
shopping. The memories of those days brought tears to my eyes.
 The bus continued northward until it stopped at the Ortisville Federal
Prison. George had been locked in a no-human-contact cell in the basement
here for two years. There was a wire barricade all the way around the
compound. The driver and the guards left the bus for a few hours, and when
they returned, about thirty inmates came on board. A large black guy sat
next to me, squeezing me into the side.
When I asked where he was going, he said Lewisburg. I remembered
George telling me how terrible it was. I began worrying as we headed west.
The snow was almost a foot deep and Route 81 was deserted. At this point,
everybody but me was going to Lewisburg—unless I was going there, too.
It was almost 9:00 a.m. when we drove into the sally port inside a 20-
foot high wall. My heart began pounding at the thought of this being my
destination. Although George had said I’d be okay at any penitentiary, after
so many killings had taken place here, I wasn’t looking forward to it. A
guard got off first and began calling out names. Another guard removed the
cuffs from those who got off. These guys all looked rough. When all but me
had left the bus, the driver came back inside. I just sat there holding my
breath.
We drove out of the pen, thank God, and in another ten minutes reached
a large college-campus-like property: ‘Allenwood Federal Prison Camp 10 11
.’ The driver told me this was it. I jumped off, and a guard came out of the
brick building to take my cuffs off, saying, “What are you doing with these
on? You don’t need them anymore.”
He took me into R&D for processing. I was strip-searched, and had my
picture taken for an ID. Then, I put on regular khaki pants and a shirt with
heavy leather boots. The guard who was going through my papers cried out,
“You lost a billion dollars? A billion dollars?”
I replied, “That’s what they say.” He asked me some trite questions, and
I told him enough to satisfy his curiosity.
After the admission process, he told me to go to the A-Unit and pointed
to a building about 300 yards up the hill. But I couldn’t move. “Go on!” he
said impatiently, thinking I was challenging his order. I started slowly
walking up the hill but had to stop to look back. There was no one behind
me! I was so conditioned to being ‘held onto’ during any movement that the
moment I began walking away, I expected a guard to run up and jump on
me. For sixteen months, I had been cuffed at the back just to go to the
shower.
 It felt strange to walk with no handcuffs and no guard holding me. I
finally reached the A-Unit: a flat, one-story building with windows all
around. Inmates were everywhere. I was put in one of six dorms. The first
four were regular dorms having 30 bunk beds and 16 single beds. Each bed
was enclosed in a ‘cube,’ a partition with a desk and a cabinet. A newcomer
was put in the top bunk of a two-man cube. After six months, he could
move down to the bottom, and then into a single cube. After two years,
depending on availability, he could move into Dorm 5 or Dorm 6, which
had 18 single cubes and were called ‘quiet dorms.’ They were adjacent to a
TV room.
Nine hundred inmates were in three units, A, B, and C. The warden’s
office was in the main building at the bottom of the hill, with the visiting
room, dining room, and control room. Three units were spread out like a fan
about 150 yards away. Between A and the Chow Hall was the Recreation
Building, with a large gymnasium and rooms for games, music, pool and
ping-pong, a big-screen TV, weights, ceramics, leather crafts, art, a barber
shop, and laundry.
Between A and B was a building that contained a library, commissary
store, meeting rooms for religious services, a business office, and the
Lieutenant’s office.
Farther west was a baseball field with a padded fence, four handball
courts, three tennis courts, a running track, a soccer field, and a half-mile
walking trail. I explored the trail on the second day. Everything was under a
thick blanket of snow, and the walking track was frozen, but I would have
been glad to be there even at fifty below zero.
From the end of the trail, I could hardly see any of the buildings. I was
out in the middle of nowhere, all alone! There were no chains, no cuffs, no
bars, no walls, and no guards. The only thing looking over me was the
wonderful sun! Because I had been watched twenty-four hours a day for
sixteen months, I felt exhilarated at not being observed by another human
being. It was unbelievably liberating. I felt like I had risen to heaven.
When my money got through the BOP’s red tape three days later, I was
able to call Akemi. She was worried because I had just disappeared and no
one would tell her what had happened to me. I described the place, and she
was pleased that I was happy there. She said my book had been released in
Japan and was already the #1 bestseller. I said I could call her as often and
for as long as I wanted, and at any time. Also, she could visit me six days a
week and seven hours on both Saturdays and Sundays. She promised to
come to see me on Saturday, spend a night in a motel, and come back the
next day. The drive was about three and a half hours from New York City.
The extent of freedom at the camp was beyond belief. The only time I
had to be in my cube was during the five daily counts (three of which were
during the night). I had to remain inside my building from 9 p.m. to 5 a.m.
Although work was required eight hours a day, most were glad to do it, just
in order to kill time. In fact, many worked at the same job as they did on the
outside: plumber, electrician, carpenter, cook, farmer, and so on.
There were two distinct classes of inmates: those convicted of white-
collar crimes (lawyers, doctors, accountants, bankers, and business owners)
and those convicted of drug crimes. The former (I called them the ‘money
guys’) were generally between the ages of 40 and 60 and predominantly
white, while the latter (I called them the ‘drug guys’) were in their 20s and
30s and predominantly Hispanic or black. All the Asians, other than me,
were drug guys. These prison camps used to be almost entirely for inmates
convicted of white-collar crimes, but since the ‘War on Drugs’ began in the
late 1980s, drug-related criminals began to arrive. Now they made up more
than 70% of the population.
The degree of punishment that being in prison constituted for the money
guys was greater than for the drug guys. Their lifestyle had to be
compromised drastically for one thing, and many had a wife and kids who
were being punished economically and socially.
The drug guys were generally single and were having the time of their
life. For many, it was like the college atmosphere they had never been
granted, or like a resort. The perception of these prison camps being like
Club Meds was correct, as far as the drug guys were concerned. But the
money guys had been used to the real thing.
The net effect of mixing a 50-year-old accountant from Greenwich and
a 25-year-old drug dealer from the Bronx in the same place, having them
share bunks, share a desk and the small space, was quite obvious. In
general, the drug guys were loud, rude, and filthy. They had no respect for
others, especially for middle-age men who had lived easy lives in the
suburbs. To make matters worse, the BOP’s policy was to punish the money
guys who had lived a better life than 95% of the BOP officials and help the
poor drug guys who were underprivileged and had lived tougher lives. So
the policy and programs were designed for the drug guys.
 For example, inmates were required to take two ACE (adult continuing
education) courses at all times. Most of these courses were designed to get
the underprivileged drug guys accustomed to being in a learning
environment, yet the money guys with high levels of education were also
made to take them. GED courses were also offered for those who had never
finished high school. If someone was in a class, he was excused from his
work assignment. If he had a drug problem, he could enter a 500-hour drug
program, which required him to be in group counseling. If he joined, not
only was he excused from work but also his prison term was reduced by a
full year.
Though the camp was largely modeled as a paradise for the drug guys,
the money guys had their share of fun, too. The three tennis courts were
always full. My friend Johnny almost lived on the court, spending at least
five hours there each day. He looked more tanned and fit than retired
celebrities in Florida. Barry, a good-looking Jewish accountant from
Boston, whose ID picture depicted an obese slob, had lost 75 pounds in six
months. What was his secret? Camp Allenwood.
All the Jewish inmates were given a special diet of raw vegetables.
Barry ate those and walked ten miles a day on the trail.
Because many drug guys didn’t have much money, they worked for the
money guys. There were many services rendered by drug guys. Anything
from protection (perceived violence in the nonviolent environment),
laundry, cleaning and waxing the cube, fitness instructor, carpentry,
massage, and so on. I hired a fitness trainer in my first year and a tennis pro
in my second year. Generally, a one-hour lesson goes for $50 on the
outside; in Allenwood it was only $7.
Some of the money guys gave their services back to the drug guys as
well. The camp was wonderful for those who had not been privileged
enough to be exposed to intellectuals. There was no other place in the world
where they had doctors (of every specialty), lawyers, accountants,
psychiatrists, investment bankers, traders, a radio talk-show host, a real-
estate tycoon, and even a judge, who were bored to death and would talk to
them for free. After a few months, I became friends with an accountant who
filed an amended tax return for me for the previous three years and got me a
$3,000 tax refund. Not a bad exchange for several packs of cigarettes and a
six pack of soda.
 In a few months, I learned the pros and cons of the camp. The place was
nirvana compared to the MCC. When I heard the money guys complaining
about this and that, I shut them up by telling them about the conditions I
had endured the previous sixteen months. When the money guys were
arrested, they might be cuffed once but would then get out on bail and go
home. When they were sentenced to a couple of years in a prison camp,
they drove up with their family in self-surrender. After saying goodbye to
their wives, they walked into the camp and headed to the tennis court.
Akemi came to see me on Saturday at 8:00 a.m. We had until 3:00 p.m.
to talk, and she would return the following day for another seven hours. The
visiting room was a large bright place with vending machines and a
microwave. It had five rows of twenty-five chairs, much like the waiting
area at an airport. There was also a kid’s playroom and a large patio with
ten picnic tables.
She was pleased to see me in regular clothes, rather than the bright red
overalls I had to wear at the MCC. We bought treats from the vending
machines and sat at the end of the row. For five hours straight, we talked
about everything and then just cuddled up and closed our eyes, as if we
were sleeping together. It was unbelievable how nice everything was. We
hoped the next two and a half years would go by quickly.
Because of the strong media reaction to my book, I received requests
from every TV network in Japan to visit me at the camp, as well as from
Time and several other magazines. I decided to accept each and every
interview because I had not been able to speak to anyone while I was
assisting, or being exploited by, the government.
The first TV crew was TBS’s Mr. Chikushi. He was labeled the Dan
Rather of Japan, and had covered Watergate in the 1970s in Washington.
Surprisingly, the BOP gave him permission to film inside the prison camp
which was then unprecedented.
In late February of 1997, a crew of five arrived. I was called to the
visiting room. Although I’d never met Mr. Chikushi, he looked familiar. It
was refreshing to be treated like an ordinary person. It had been so long
since anyone other than inmates had talked to me with respect. They set up
lights and microphones in the visiting room, and he began the interview.
This was exciting, because millions of Japanese people, including many of
my relatives, watched his program. He asked me at the onset, “What would
you like to tell the Japanese people?” I said, “I am very sorry for causing
this trouble,” and bowed my head. This sounds very simplistic, but it is how
public apologies are made in Japan.
Looking right at the camera, I knew I was speaking to millions of
people who were wondering what kind of person I was. After this, I said I
had written a book to explain what had happened, so the scandal could be a
valuable lesson to the Japanese business world. For me to be able to get this
message across to millions of those who were the real victims was very
significant, and it strengthened my sense of having done the right thing.
After an hour-long interview, we went into the Chow Hall and Mr.
Chikushi had lunch in the officers’ dining area. The crew filmed him eating
the same food as the inmates. Then, we toured the whole compound. I acted
like a guide, walking the camera crew around the camp. They filmed my
cube, the TV room, the library, the commissary, and the gym.
When all the filming was done, he wished me luck, and we shook
hands. It was very nice indeed. For breaking the U.S. law, I had paid my
dues to society hundreds of times over by assisting the government, and I
was still serving my time at this camp. For causing the loss to the bank, I
had written a confession letter to explain the improprieties and provided all
the documents. For causing trouble to my family and relatives, I had made
amends by writing a book and publicly apologizing. I finally felt I had done
all I could to redeem myself as an honorable person. Although I still had to
stay in prison for twenty-seven more months, followed by five years of
probation and nearly $2.5 million in fines and restitution, I was ready to
build a new life.
A day after the TV interview with Mr. Chikushi, at about 10:00 p.m., a
female hack (guard) came over to my bunk and told me to go to the
Lieutenant’s office. I was already in bed, but got up and walked over. The
Lieutenant said he had heard I had been roughed up that evening. I told him
it wasn’t true, but he wouldn’t believe me.
“My source is very credible,” he barked. “When he says you were
roughed up, we have to believe it.”
“But sir, I am telling you I was not roughed up,” I replied.
“We know you have lots of money. And guys who don’t have money
get funny ideas, you know.” I had learned not to shatter their fantasy when
they implied that I was loaded.
“Lieutenant, I was not roughed up by anyone, so can I go back to my
cube?”
 “I’ve got pictures of the five black guys who roughed you up tonight. I
was gonna lock you up for your protection, but the Assistant Warden told
me not to.”
“Jesus, what do I have to do to convince you I was not roughed up?”
“A PA will be here in a minute. He’ll check you for injury.” Just as he
said it, a PA arrived from the hospital. I was told to take my clothes off in
the back room. It was no different from the strip-searches, except the PA
had to report every cut and scratch. I returned to the Lieutenant and asked if
he was satisfied. He told me with a straight face, “Well, we are doing this
for your own protection.”
The next day at the chow, a disreputable-looking guy walked up and
said, “Hey, I heard you were roughed up yesterday. Look, if anybody gives
you a problem, you come to me. I’ll take care of it.” I didn’t like the way he
presented himself as a concerned fellow inmate because he had a devious
look on his face. I told him I could take care of myself, but thanked him.
Later, I found out he hustled for any money-making opportunity and
worked as an orderly in the Lieutenant’s office.
This was not the only time I was pressured. The camp officials were
truly the pettiest people on this planet. They were jealous of the money
guys, who had more in their commissary accounts than the officials had in
their bank accounts. Some were typical rednecks from nearby towns. One
white hack, who had long blond hair pulled back in a ponytail and wore his
pants so tight bulges were visible on both sides of his trousers, was the
perfect picture of a bigot. Many of these guys didn’t hide their feelings
toward the Japanese banker they assumed had hidden millions of dollars in
a Swiss account. While I was there, I knew was at their mercy.
Each inmate was assigned to a case manager, who was supposed to help
in any legal matter. My case manager was a black guy named Furman. He
hated me from the moment we met because of my background. After three
months, I was called into his office and told to start making a $1,000
monthly payment toward my restitution obligation. I replied that I was only
required to make payments based on my earned income. Besides, I had no
money after forfeiting all of my assets to the government and paying for the
appeal lawyer. I showed him how I had complied by paying part of my
royalties. He stared at the judgment and asked again when I was going to
start paying the $1,000 per month. I told him respectfully that he couldn’t
impose a separate financial obligation on me.
 “So, you’re refusing to pay $1,000 per month?”
“Mr. Furman, I only follow the judge’s order, not yours.” He told me to
get out of his office and put me on a ‘financial obligation refusal’ status. I
remained on this for nine months, which cost me my monthly paycheck of
$18 and various privileges. One day when I asked him why he was
discriminating against me, he told me I didn’t know what I was talking
about. I replied that he had no idea what it was like to be in a small minority
in this country with no political representation.
“You don’t know nothing about discrimination,” he growled.
“You are wrong, Mr. Furman. You don’t know as much as me about
being a minority. Here, I am the only Japanese-American. I have no one to
help me.”
As if I was preempting his right to cry discrimination, he refused to
accept this. He showed no empathy toward me but showered kindness on
the black inmates. I was the only inmate told to make a $1,000/month
payment. He wouldn’t admit he discriminated against a minority. Being
neutral in the environment of blacks and whites, I noticed blacks openly
discriminated against whites, while whites discriminated against blacks in
privacy. A black inmate could scream with impunity in a dorm, “You white
mother!” If a white inmate did the same, he would be dead within minutes.
Seeking justice, I reported Furman to the Unit Manager, but he refused
to get involved. I went to the Warden, who was also black. He showed no
sympathy either. Allenwood Federal Prison Camp officially backed
Furman’s claim that I had to pay $1,000 per month because of who I was.
The BOP was not about to call off their jealous dogs, so I wrote to
Figel, who represented the government. I told him I had stood by my end of
the deal and it was time for him to show me what justice was all about. I
said I would accept any punishment the judge ordered, but I had no legal
obligation to accept the BOP’s illegal action. I waited for his response for a
month, but it was apparent he had no intention of doing anything for me. As
George said, he had thrown me to the wolves.
There was only one option. I wrote a letter to the judge asking him to
intervene for the sake of justice, although I didn’t think it would work since
I had appealed his sentence. To my surprise, within a week I received a
letter back confirming that I did not have to make any payments other than
what had been ordered by the court. He also sent a copy to the Warden.
Although I had not been happy with his original sentence, I respected him
for upholding justice.
During the next six months, I had three more TV interviews but no
more camp tours. Akemi visited me almost every weekend, and we talked
on the phone every day. After the first year, my daily routine was pretty
much established. I got up at 7:30 a.m., put on my boots and gloves, and
cleaned the bathroom. This took about an hour. By 9:00 a.m., my duty was
done and the rest of the day was mine. I sat in a quiet room editing King of
Prison in the remainder of the morning, and then headed down to the mess
hall. After lunch, I went to my horticulture class, which I really enjoyed.
For some reason, only the money guys got into this class, and it gave us a
needed break from the raucous behavior of the drug guys.
Our teacher was a local farm boy who was supposed to teach us how to
grow plants. We spent an hour in a classroom and then went outside to work
in the gardens. He taught us how to plant our own flowers and vegetables.
We had a tractor, which I learned to operate, and a large greenhouse in
which we started our seedlings. Once they were growing, we began taking
field trips in the woods. Imagine about fifteen guys with an average age of
45 exploring the woods like a bunch of boy scouts identifying plants and
trees. This became a daily routine. At the end of the season, we all had a
license to operate a nursery business, and another for spraying pesticides in
Pennsylvania.
After the horticulture class, we were counted at the cube and went to
dinner. The cafeteria was like a huge resort restaurant with a salad bar in the
center and a large Swiss Chalet window on one side with a nice view. The
food was excellent, although steaks were served only on holidays. After
dinner, I walked the trail with my friends for about an hour, and then either
hit the tennis court or the weight room for the remainder of the evening.
Many inmates spent their time in front of six TVs with a bag of popcorn or
in the card room playing pinochle and spades.
Everything was relative. Despite this comfortable lifestyle, most of
these inmates complained incessantly at being there. They didn’t know
what it was like to be in a real prison. They would never be handcuffed in
back to go to the shower room or told to spread their cheeks in front of a
guard. They would never sit in a 4’ x 6’ urine-stained holding cell with no
windows for more than four hundred hours. They would never know how
depressing it was to be locked in a hole and not see the sun for sixteen
months. Because of my experience at the MCC, I was able to appreciate and
enjoy life at the camp more than anybody else.
Akemi visited me almost every week and brought my sons several
times, and my sister came from Japan for a visit as well. I learned how to
play tennis, and, in combination with working out with heavy weights, I
became, at 48, more physically fit than when I was 20.
With all the time I had, I read several books and was nearly finished
with my book about George, King of Prison. I also took advantage of
talking to many professionals and learned a great deal about health, law, and
accounting. After two years at the camp, I was lean and healthy and had a
ton of knowledge.
None of this would have been possible without Akemi supporting me
throughout the ordeal. Although she was alone in New York, I was able to
sleep at nights without worrying about her because the most honorable man
I had ever met, Ed Stroz, kept his word to look after her while I was away.
He did exactly that, making himself available to her at a moment’s notice
through his beeper.
All that said, why the government wants to provide these wonderful and
invaluable opportunities to criminals at such great expense completely
escapes me.
Without exaggeration, if not for the ‘convicted felon’ label, I would
recommend anyone to spend a few years there. It would be a great
experience for a 20-year old as well as a 50-year old. Seeing all the
homeless people living in cardboard boxes in the New York subway
stations, I wanted to tell them, “Hey, commit a Federal crime and enjoy a
two-year vacation at Camp Allenwood. And if you want to leave early, just
tell them you’re a drug addict.”
Responding to recent examples of corporate crimes, the lawmakers and
the government officials are now calling for tougher punishment for
corporate criminals. Not surprisingly, jail time is at the top of their list. But
the actual prison to which those convicted of corporate crimes are sent is no
deterrent at all.
In reality, there are neither bars nor walls. Instead, the “prisoners” have
tennis courts and baseball fields. And if they have some money, they can
hire the indigent inmates to do all of their chores so they can live like a
king. They are in no way cut off from the outside world. They can make as
many calls as they like and receive visitors six days a week. In fact, they
can have as many contacts as they please, though others cannot contact
them unless it’s first approved. They are conveniently protected from the
public. If there are thousands of angry people you have swindled, Federal
prison camp is the place to be. Just ask Bernie Madoff.

Time, October 9, 1995

1996 Allenwood FPC

 Japanese TV interview with Tetsuya Chikushi.

In November of 1998, I left the camp after twenty-two months and

moved to a halfway house located on 31st Street in Manhattan. I was told to
find a job and turn over 25% of my paycheck. The whole idea was absurd,
as no one in their right mind would hire someone who just got out of prison
for losing $1.1 billion of his employer’s money. The people who ran the
halfway house were civilians but they seemed to enjoy demeaning their
residents as if they were prison guards.
Since my plan was to be a writer, I asked them if I could go to the city
library and write. Instead of saying, “No,” they said, “Unless you find a job
and turn over 25%, we will send you back to prison to finish your time.” I
had five more months to go. So, I asked Stroz, who had been supportive to
both Akemi and I, to explain my contribution to the case against Daiwa
Bank. With his intervention, they reluctantly agreed to my library visits,
with the condition that I still paid them 25% of the minimum wage I would
have received, had I worked, out of my own pocket.
Five months later, I was released from the custody of the Bureau of
Prisons into the supervision of the Probation Department. After four years
of incarceration, I had five more years of probation. Finally, I moved into
Akemi’s apartment on the Upper East Side. It felt so good to have my
privacy back and to be with her again. Two weeks later, we walked into
City Hall across the street from the U.S. Attorney’s office and exchanged
our wedding vows. My older son, Ben, was there to witness the rebirth of
his father.
Four months later, we moved to Atlanta to begin a new life. As soon as
I got down there, I visited the Georgia State Probation office, which gave
me 60 days to find a job or leave the state. The Georgia probation officer
didn’t hide his feelings about a Japanese banker who lost $1.1 billion. Even
in the backwoods of Georgia, with my rather bizarre criminal background,
it was nearly impossible to find a job. After being turned down by every
prospective employer, including the local Kroger supermarket as a bag boy,
I finally was made an apprentice at a cabinet factory for $10 an hour.
Meanwhile, I continued working on George’s book, and in August of
2000, King of Prison, was published in Japan.
George remained in the MCC until he was transferred to the Federal
Prison in Texas in August of 1998. Eventually, he was released from
Supermax Prison ADX Florence in Colorado in February of 2002 and at
last reunited with his wife, Barbara.
As for Araki and Yagi, friends at Daiwa told me that they were
promoted to branch managers. Though I have had no contact, I am very
happy for them.
In October 2000, a class action lawsuit was brought against eleven
former senior managers of Daiwa. The plaintiff sought $1.4 billion in
damages; however, the Osaka District Court ordered the senior management
to pay a total of $875 million to Daiwa. It was the first time ever in the
corporate history of Japan that management was deemed liable for a loss
caused by its employee and it generated heated arguments among the
business community. Understandably, the strongest criticism came from
corporate directors, who claimed that no one would dare to become a
director if he/she is held personally accountable for the loss caused by an
employee’s wrongdoing. A year later, the parties reached an out-of-court
settlement for $2.5 million, which was the total annual salary of eleven
members of senior management. Japanese executives earn only a fraction of
their American counterparts.
Reid Figel, the prosecutor who managed to win a guilty plea and siphon
$340 million from Daiwa with the information provided by me, received
the Attorney General’s Award for Distinguished Service for United States
of America vs. The Daiwa Bank and now is a partner at a reputable
Washington, D.C. law firm.
His former boss, Mary Jo White, after leaving the U.S. Attorney’s office
with an accolade for punishing a Japanese bank, went back to her old nest
of Debevoise & Plimpton. In April of 2013, she was nominated by
President Obama to head the Securities and Exchange Commission (SEC).
Ed Stroz, the FBI special agent, has started his own firm, Stroz
Friedberg, after leaving the Bureau as the chief of the Computer Crime
Squad. When I moved down to Atlanta, I began writing a financial novel in
Japanese with him as the protagonist. He not only agreed to have me
interview him for ten hours for this book, he was a gracious host as Akemi
and I stayed at his home in New York. His company, Stroz Friedberg, has
since grown to be a global leader in investigation, intelligence and risk
management with offices in eleven major cities. Though we have not been
able to get together often, he is still my hero.
 As for Daiwa Bank, after the U.S. regulators ordered it to close its
North American operation, it effectively lost all of its international banking
business. Devastated by the loss of international function, in 2003, Daiwa
became unable to maintain the capital ratio above 4%, which was the
minimum requirement for a domestic bank. In the end, it had to be rescued
by the government and changed its name to Resona Bank.
Although I assisted the U.S. Attorney’s office in their effort to prosecute
Daiwa, even to this day, I am profoundly sorry that the senior management
decided to turn me in without any indication of their intended action. By
turning over my letter of confession to the FBI, they sealed their own fate. I
had no choice but to cooperate with the authorities. Nevertheless, it was
insanely submissive that they agreed to pay a record criminal fine after
losing the U.S. banking license for such a minor infraction that caused no
harm to anyone. One does not pay a fine after receiving a death sentence. It
should be one or the other.
As for me, I returned to Japan after 37 years of an attempted American
Dream to be with my family. While the world of high finance still interests
me, I started a language education software company. Dealing with many
young people who are studying to be part of the global financial field, I
cannot help feeling apprehensive about their future.
As you may recall, I was not even hired as a trader. It was because the
bank had a pressing mandate to produce profits in the backdrop of sweeping
deregulations in the financial markets, that I was given the job of carrying
the torch wearing two hats. Don’t get me wrong. I was honored to do it,
except that neither I nor the management had any idea about the trap
waiting for us ahead.
High finance is a risky business. Many new college grads head for Wall
Street with an ambition to make millions but they also understand the high
risk of failure. It’s a dog eat dog world. Well, my father got me this job at
Daiwa because working for a Japanese bank was perceived to be the most
conservative and most secure job in the world. When I accepted a job of a
trader, I was making an annual salary of $40,000 as the head of the
securities custody department, when my counterparts at investment bankers
were making well over $200,000. I wasn’t complaining because I thought I
had a very safe job at Daiwa, which was the most important thing to me
then. Little did I know that this ‘side job’ at Daiwa bore such risk that
potentially it could destroy the whole bank.
 Though the consensus on risk-reward ratio of each profession is pretty
much established, one must be extremely careful when considering the
financial field. The extent of personal risk for being an engineer, a dentist, a
professor, or an oil company executive is not very difficult to fathom.
However, working in a financial institution, depending on where, you may
be at a risk you may never even dreamed of. As the traditional role of the
financial industry gives way to a legalized gambling casino where high
frequency traders and quants rule the game, one must do necessary due
diligence before accepting any job.
From this ordeal, I’ve learned several important lessons. One is not to
put your fate in the hands of people in high positions, like judges,
prosecutors, bank executives, lawyers and regulators, not to mention
politicians. When the chips are down, you are on your own because their
priority is to cover their ass and their precious career. Their righteous
rhetoric is only for securing their own career. I may sound overly cynical,
yes, cynical but not critical because I don’t fault people for trying to protect
their own little world as long as it does not cause harm to others.
Another lesson that I’ve learned is that one should strive to live a life of
total honesty. In a life of total honesty, one lives without fear and that is the
only way to live. My story is a great example of how a single lie can turn
into a nightmare of two decades. Having said that, one must be aware that,
in our justice system, honesty means self-incrimination. George
Washington’s father might have praised him for being honest, but had he
cut the cherry tree in a municipal park and gotten charged with destruction
of public property, his father might not have advised his son to be so honest.
Unfortunately, in modern society, admitting your guilt and being honest are
two different things.
 Chapter 23

Rogue Myths
As each case has its own set of catalysts, there are some common myths
that need to be addressed if we are to understand the minds of rogue traders
and prevent occurrences of billion-dollar losses.

Myth #1: Rogue traders are criminals who operate out of greed.
Nick Leeson of Barings Bank, Jérôme Kerviel of Societe Generale, and
Kweku Adoboli of UBS were all charged with fraud and sent to prison, as
were Bernard Madoff and Ivan Boesky.
Unfortunately, most people do not distinguish between the two groups.
The former caused a loss of billions of dollars to their employers in an
attempt to recoup the original loss so that they could keep their job. The
latter, on the other hand, robbed billions from unsuspecting investors out of
sheer greed. The victim’s loss equals the gains for the perpetrator.
When prosecutors pursue a rogue trader with fraud charges, it sends a
signal to laypeople that he is no different from a Ponzi-scheme operator
who swindles a billion out of investors. However, there is nothing
sensational about rogue traders. A rogue trader is not a devious criminal
like Bernard Madoff or a greedy scoundrel like Ivan Boesky. Contrary to
the image often portrayed by media and law enforcement, they are ordinary
traders who inadvertently got caught up in a precarious environment which
lacked adequate oversight.
The law does not take into account the criminal intent and venality in
the motive of the perpetrator as they do with murder and assault. Federal
sentencing guidelines set offense levels by the amount of losses the victim
suffered. Not the level of venality.
For example, a rogue trader who loses $500 million, in an effort to
recoup money for his employer gets an offense level of 30, which calls for a
10-year prison sentence. If a swindler fleeces $500 million from investors,
he gets the same jail time.
Along with the motive, the law also needs to consider the chances of
recidivism. From my own experience, I can assure you that a rogue trader
will never in million years try to repeat his actions, because all he derived
from it was pain. On the other hand, when given an opportunity, thieves and
swindlers are likely to try again. ‘I’ll get it right next time,’ is the lifelong
crook’s resolve upon being caught.
When lawmakers fail to make this distinction, by treating rogue traders
as venal thieves and the media labeling them rogue traders, they are in
effect creating a moral hazard by giving exonerating the executives who are
entrusted by the shareholders to run a safe and sound operation from any
culpability.
JC Bruce said it well, “By attributing these actions (unauthorized
trading) to ‘rogues’ it immediately becomes unforeseeable, unpredictable
and virtually unpreventable, thereby exonerating all those that should have
created an environment where this type of behavior would be inhibited.
Rogues are the perfect scapegoat to shift the blame for incompetence and
ineptness on the part of ‘very’ well remunerated executives and less well
remunerated regulators. Executives and regulators alike can wash their
hands of these events as it was unforeseen…”
To boost the perceived value of their own performance, law
enforcement officials tend to exaggerate the enormity of the crime.
A statement by the City of London police about Kweku Adoboli read,
"This was the UK’s biggest fraud, committed by one of the most
sophisticated fraudsters the City of London police have ever come across.”
It sent a completely erroneous message to the public about Mr. Adoboli.
In my sentencing, the judge said, “There is no question that this was a
crime of historical dimensions and potentially world-shattering
implications. So it really is not at all inaccurate or hyperbolic to say that
what you did, Mr. Iguchi, however it started, and why ever it continued,
threatened the well-being of uncountable people all over the world.” My
judge needed to enhance the gravity of my impropriety to justify giving me
a 12-year sentence.

Myth #2: Rogue traders are the culprits and banks are the victims.
The reason I call Barings, Daiwa, Allied Irish, UBS, Societe Generale,
and JP Morgan Chase ’rogue banks’, is because if any of these so-called
’rogue traders’ had been working at institutions with proper oversight, they
couldn’t possibly have done anything similar.
 There is nothing special about these traders, because all four Treasury
bond traders at Daiwa Bank ended up engaging in unauthorized trading,
which simply shows that the environment was conducive to this type of
activity. I can attest to the fact that Yagi and Araki possess as much integrity
as anyone that I know of, if not more. In fact, they have made branch
managers in Japan and finished their career as respectable bankers.
Financial institutions tend to become more opportunistic especially
when profits are lagging in other areas. Of all the profits banks generate,
trading profits are always the quickest and easiest way to paper over their
mistakes.
For the CEO who needs to meet shareholders’ expectations,
encouraging traders to take more risks by loosening the rules a bit is not out
of the question. The end justifies the means. Especially in smaller
institutions, where traders are often regarded as a rainmaker.
This is because the heads of these outfits are usually under a lot of
pressure to produce profits while holding down unnecessary expenses.
Therefore they tend to compromise risk controls for more profitable
opportunities. What makes a bank rogue is the corporate culture that
rewards risk taking over risk control, profits over business ethics. And who
prescribes this culture? None other than the CEO.
I believe that the true culprit is not the trader, but the CEO who allowed
his or her employees to behave in an opportunistic and less ethical way for
gain. How can the institution expect their traders to follow internal rules
when it is committing its own crimes, such as with the recent LIBOR
fixing, for example. Having a “do as I say, not as I do” policy will backfire
for sure.
Criminally prosecuting traders by the sheer amount of the loss without
taking into account the situation under which it happened is clearly wrong.
It seems that the public has no problem criminally prosecuting a rogue
trader as a fraudster but would they feel the same way if it happened in
other industries?
Let me illustrate. A large cargo ship sinks due to the damage it suffered
when it hit a rock. A new engineer whom the captain entrusted to handle the
navigation made an error in judgment and didn’t alert the captain about the
damage in fear of his own dismissal. He tried frantically to repair the
damage on his own but to no avail. All the while, the captain, who has been
told by the company management to speed up the sail, neglected his duty to
implement a stringent monitoring system which would have detected the
damage. In the aftermath, the management of the transport company as well
as the captain shift all the blame on this engineer and calls him a ‘rogue
engineer’. Meanwhile, the law prosecutes the engineer for not reporting the
initial damage and for attempting to repair it himself, and sentences him to
a long prison term.
Does this sound fair? Should any employee be criminally responsible if
his error in judgment causes a loss to his employer even if he had the
correct intention?

Myth #3: A proper internal control system will prevent future

occurrences of ‘rogue trader’ incidents.
This is perhaps only partially correct. No matter how perfect the internal
controls are, there always are some cracks that will be exploited by a
desperate trader. These cracks may be due to some flaws in the logistics, or
a weak link that exists in the network of employees whose job is to
understand and negotiate through the intricacy of the modern trading
operation. The truth of the matter is, you cannot be 100% certain of your
system being foolproof until it is tested. Think of it as a ship. It may appear
to be waterproof but without putting it in the water, there is no way to detect
any pinholes or cracks. You only find out when water starts to seep through.
In other words, it is literally impossible to detect a hairline crack in your
internal control system from the management side. Traders are like water.
They are much more capable of finding a crack in the system. If you wish
to know how good your internal controls are, test them by challenging the
traders to ‘break’ the system.
Unfortunately, what many executives fail to understand is that the
prevention of rogue trading is not entirely about beefing up the internal
controls. In an overly opportunistic corporate culture, even perfectly
implemented controls can fail.
In particular, many smaller institutions, due to the general budgetary
constraints, are forced to compromise on their operational risk controls,
thereby putting too much responsibility on the shoulders of low-paid risk
management personnel. If the outfit is an extension of a larger institution,
such as Barings, Daiwa, Allfirst, and even JP Morgan Chase, the mandate
that comes down from the headquarters is often so ambitious and unrealistic
that the managers are forced to prioritize risk taking over risk control.
 Bruce makes it abundantly clear that “A combination of factors like
inappropriate incentives for staff and management, encouragement of
extreme opportunistic behavior, weak or passive internal control structures,
erratic and partisan regulatory and judicial behavior, all contribute to the
creation and maintenance of a culture of extreme opportunism.” Proper
internal controls is only one element of a holistic approach required to
inhibit ‘extreme opportunism’ in financial markets.

Myth #4: The Justice Department is genuinely concerned about the

safety of financial institutions.
In my sentencing, the prosecutor trumpeted his victory in prosecuting
the perpetrator who threatened the safety and the health of an international
financial institution, Daiwa Bank. At the same time, he was trying to siphon
a billion-dollar fine from Daiwa for failing to report my transgression
within 30 days. What hypocrisy!
The Daiwa case was far from recent examples of excessive greed, as
seen in HSBC’s money laundering case or the LIBOR rigging conspiracy.
In the spectrum of criminality, Daiwa had to rank at the bottom.
On August 8, the MOF instructed Daiwa, albeit tacitly, not to disclose
the loss until the end of September 1995 because their concern at that time
about systemic risk was very real. It was not the sort of crime where Daiwa
was victimizing anyone, nor was it threatening the U.S. financial markets.
Since the Bank of Japan was the lender of last resort in the event of
Daiwa’s failure, shouldn’t the U.S. Attorney’s office have respected the
MOF’s decision? Instead, they prosecuted Daiwa mercilessly without
regard to Japan’s systemic concerns.
In recent days, the DOJ seems to show different standards when it
comes to pursuing criminal prosecution of bankers. During the S&L
debacle of 1991, there were more than 30,000 criminal referral forms
submitted which led to the conviction of more than 1,000 bankers.
The financial crisis of 2008, an event that caused 70 times larger losses
in total, failed to produce a single criminal prosecution of senior Wall Street
executives. To make matters worse, in the aftermath of the crisis, it emerged
that a slew of major banks were also committing crimes of money
laundering for drug cartels and fixing LIBOR. Even at this point, the DOJ
elected not to pursue criminal prosecution of the banks and its senior
executives. Instead, it settled with mega fines.
 One of the reasons for this apparent shift in the DOJ’s policy is said to
be due to the pressure from the regulators to avoid criminal prosecution of
major banks in fear of systemic consequences. However, the ‘too big to fail’
argument is misplaced as it is not the corporation that commits criminal
acts, but its employees.
By requiring a corporation to pay a fine without holding management
accountable, we are only punishing the shareholders. Since the days of the
S&L crisis, our justice system has lost its fairness and the principles it once
stood for.
In 2012, the UK’s largest bank, HSBC, was accused of laundering
billions of dollars for rogue states and drug lords, and fined $1.9 billion
without admitting any wrongdoing.
Despite these heinous crimes, HSBC received what is called “Deferred
Prosecution”; basically probation, and not one HSBC executive was
prosecuted criminally. In defending its decision of not prosecuting the bank
criminally, the DOJ said, “Had the U.S. authorities decided to press
criminal charges, HSBC would almost certainly have lost its banking
license in the United States. The future of the institution would have been
under threat and the entire banking system would have been destabilized.”
Apparently, HSBC is too big to jail but Daiwa was not. HSBC’s fine,
though it sounds significant, equaled to mere 10% of their annual pre-tax
profit and perhaps a few percent of the illegally earned profits since 2004.
Given the fact that Daiwa’s crime neither produced any pecuniary gains nor
harmed anyone, the U.S. authorities’ merciless punishment of Daiwa
looked more like retaliation against Japan for its financial aggression during
the 1980s than justice.
In a 2005 interview with Corporate Crime Reporter, Mary Jo White
defended the DOJ’s deferred prosecution agreement;
White: “What has happened is that since Arthur Andersen, the Justice
Department, to its credit, has focused on the awesome collateral
consequences of moving against an entire entity criminally. The stigma of
that, the reputational hit of that is too severe for most companies to survive.
And so, they have turned to what they consider to be a lesser sanction with
lesser collateral consequences. And that is the deferred prosecution
agreement, which can take many forms.”
CCR: “When you were U.S. Attorney, you didn’t hesitate to put
companies out of business – Daiwa Bank, Republic Securities.”
 White: “Daiwa Bank couldn’t do business in the United States, but they
continued to do business in Japan. Any prosecutor hesitates before bringing
an action against a company because of the fear that that company will go
out of business. Now, it is not impossible that you come to a situation as a
prosecutor where because you have a company that has a horrible
regulatory history, horrible regulatory reputation, that it could be in your
judgment in the public interest that the company shouldn’t be in business
any longer because it is likely to continue to victimize the public. But every
prosecutor, certainly if they are doing their job right, is very concerned
about the impact on the innocent employees or shareholders, if you bring a
corporate charge. And certainly, I went through that analysis. I did indict a
number of companies when I was U.S. Attorney. But I think if you look –
none of them went out of business.” Little did she know that Daiwa
practically went under in 2003, only to be rescued by the Japanese
taxpayers’ money.

Myth #5: Criminal prosecution and jail time is the best deterrence for
unauthorized trading that result in huge losses.
Until Bruno Iksil of JPMorgan Chase who escaped criminal prosecution
by cooperating with the authorities, all rogue traders had been given a
sentence of imprisonment for anywhere from four to ten years for their
deed.
Modern justice systems around the world now seem to have a consensus
on the just punishments for these rogue traders.
As I reiterated earlier, we now know that their venality and the
possibility of recidivism are both non-existent in rogue traders. Before they
engage in rogue trading to dig themselves out of the hole, especially after a
rather lucky string of profitable trades, there may exist an element of greed
as they are compensated based on the profits they generate. However, once
they take the first step in violating the internal rules, their motive is
invariably to get out of the hole to restore a clean slate.
At this point, there is no element of greed left in them. Despite the
ultimate size of the loss, the motivation for their rogue trading is simply to
recoup whatever small loss they had incurred from their refusal to accept
defeat in the last trade. So then, what is the rationale in locking them up?
Obviously it is retribution and general deterrence. However, as my
sentencing judge admitted, he didn’t have the slightest doubt that my
existence for the past 13 years had been a living hell. Unlike many financial
criminals, ’rogue traders’ do not enjoy the fruit of their impropriety.
On the contrary, most rogue traders were in constant fear and pain, as I
myself was. Nevertheless, judges feel compelled to impose harsh
punishment given the amount and high profile nature of the losses involved.
What these judges are missing is that in a rogue trader case, the amount
of money the institution has lost is not at all commensurate with either the
level of venality or the pecuniary gains the trader has enjoyed.
Instead, 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 activity to continue.
As for general deterrence, my sentencing judge felt, despite my
unprecedented assistance to the government, he had to give me a harsh
sentence to deter others from doing what I did. However, not only did my
sentence fail to deter other unauthorized losses, but they have gotten even
bolder, and now a one billion dollar loss seems relatively small. If you truly
understand the nature of unauthorized trading losses, you will understand
why a harsh sentence does not deter others from doing it. Now you can see
how a harsh retribution could drive a trader to the ultimate blow-up position
rather than deter it.
Furthermore, in some cases, when the impropriety is discovered by his
boss, it is not hard to imagine that the boss whose job is also now in
jeopardy, may look the other way or even aid the trader to conceal the
impropriety. In such cases, you could see more people up the ranks getting
involved as they all weigh the situation in terms of their job security. When
this happens, the damage will continue to widen as they can sabotage the
internal control measures much more easily.
Contrary to popular belief, by rewarding the traders who come forward
early will absolutely end these billion dollar losses . Remember, they don’t
like what they are doing and they want to end it, if it can be done without
much pain. At any time during the twelve years I was hiding the loss, had
Daiwa told me, "If you are violating our internal rules and hiding some
trading losses, just come forward and disclose everything, we will either let
you walk or give you a clean slate," I wouldn’t have thought twice and had
done exactly that. It may seem absurd to some, but had Daiwa offered that,
they could have avoided losing another $999 million. When I was down $1
million, I felt my life was over and I contemplated suicide. If it were not for
the love of my sons, I might have. That is to say, I was that desperate. So, if
I were given an opportunity to just walk away from it, I would have taken
that offer in a heartbeat. And I am certain that all other rogue traders would
have done the same when they were down only a few million dollars.
Though some may have difficulty accepting my proposal of
incentivization, management needs to understand that had the institution
implemented proper internal controls, he could not have done it in the first
place. The important thing now is to nip any rogue trading in the bud.
Here is what I would tell all traders:
“If you are already in violation of the internal rules, come forward
immediately regardless of the amount. Though you may think there is a
chance to recoup the loss, it is no longer necessary. If you come forward
voluntarily, we will help you to get back on your feet. You will not be
responsible for the loss.”
Criminalizing unauthorized trading, therefore, is a mistake, for it is not
a crime of venality. After what I have gone through and had enough time to
analyze the true motives of other rouge traders, I would go so far to say that
a rogue trader is the victim of the corporate culture that disregards proper
risk controls and pursues profits at any cost, which is unique in all ’rogue
banks’.
Just remember, all unauthorized trading losses start from $1. It is up to
the institution to stop it at $100,000 or even $1 million, or let it soar to $1
billion or more. As shown in Myth #1, for the offense against a person,
there are seven categories. First degree murder, second degree murder,
voluntary manslaughter, involuntary manslaughter, assault with intent to
kill, aggravated assault, and minor assault.
However, for basic economic offenses, the following forms of fraud are
all thrown into one category of ‘fraud’. That includes larceny,
embezzlement, and other forms of theft; offenses involving stolen property,
property damage or destruction, fraud and deceit (insider trading and
unauthorized trading fall under this category), forgery, and offenses
involving altered or counterfeit instruments other than counterfeit bearer
obligations of the United States.
In the offense against a person, the difference is the intent. For instance,
the offense level for first degree murder is 43 which calls for lifetime
imprisonment, while the offense level for involuntary manslaughter is 12,
which calls for an imprisonment of just ten months. (That is, if they can
prove that the defendant clearly understood the risk and then chose to take it
anyway.)
In economic offenses, the lawmakers apparently felt the amount of the
loss should determine the offense level. However, the amount of the loss
does not take into account the intent of the offense, which is a major
determinant in the offense against the person.
In the case of rogue trading, the amount of loss largely correlates with
the degree of laxity or deficiency of effective controls in the institution and
to that end, the bulk of the culpability should rest on the management. The
trader was, no matter how poorly he was executing it, doing his best to
make money for the institution.
There is an urgent need for global consensus in determining the true
culpability of a rogue trader. By treating a rogue trader as a venal swindler,
not only are we exculpating the management but also negatively
incentivizing the trader to continue.
Lawmakers should disqualify unauthorized trading as fraud, unless
there is an explicit criminal intent to enrich oneself through such activity. In
the absence of criminal intent, unauthorized trading should be treated at
worst as an offense equivalent to a ‘minor assault’ as in bodily injury, if the
loss did not jeopardize the safety of the institution, and ‘involuntary
manslaughter’ if the institution fails.
 Epilogue
With these myths debunked, let’s look at how rogue trading starts. First, we
need to make a distinction between trading and investing. Trading is an
activity in which a trader buys and sells a commodity for short-term capital
gains, while investment is based on fundamental reasoning and is
principally a long-term commitment to a company or credit for long-term
capital gains or income gains.
Trading activity can be engaged in by just about anyone. With very
sophisticated trading platforms readily available to individuals, there are an
ever-increasing number of day-traders across the globe. Before individuals
started trading on their own, one only found traders in banks, investment
banking houses, and hedge funds. Mutual funds are typically limited to
investing. Trading at a traditional investment banking house can be
classified into two basic categories: Directional trading versus non-
directional trading (i.e. arbitrage and option strategies).
Typically, non-directional trades are safer and produce steadier profits if
implemented properly. In directional trades, the results can be extremely
volatile. My bond trading was directional, going either long or short. Most
of the large rogue trading losses were invariably a result of directional
trades going bad. Regardless of the type of trading, we must accept one
sanguine reality about trading. That is, trading is a zero-sum game. (Some
say it is a negative-sum due to the slippage.) If a trader makes $10,000,
someone else, individually or collectively, is out $10,000. The money didn’t
fall from the sky.
So, for any trader to make steady profits, he had to be exceptionally
good. There are great traders like Kenneth Griffin, Bruce Kovner, Paul
Tudor Jones, and John Paulson who have literally made billions from
trading. The statistics show that in the long run, 99% of directional traders
collectively lose money to the 1% who are genius traders.
We tend to glorify trading jobs and often believe that there are people
who can predict the market direction accurately. History will tell you that
no such person exists. The great traders are not necessarily accurate
forecasters. Paul Tudor Jones does not have a crystal ball but he does have a
very strong will to keep his ego in check. That is the hallmark quality of a
great trader. Jones said it best in the book by Jack D. Schwager Market
Wizards , “Don’t be a hero. Don’t have an ego. Always question yourself
and your ability. Don’t ever feel that you are very good. The second you do,
you are dead.”
With this basic understanding of trading activities, let’s look at the
stages through which most rogue traders evolve:

Stage 1: Climbing the ladder

A trader with a set of solid trading rules usually trades well at first. He
manages his risk well by cutting the losers quickly and letting the winners
run. As he continues to trade well, he receives admiration from his peers as
well as his bosses and is rewarded accordingly. His lifestyle improves
dramatically. People around him will inflate his ego by calling him a star
trader. If the culture of the firm is that of extreme opportunism, they will
expand his trading limit and give him greater latitude. He becomes the
rainmaker. He becomes larger than life.

Stage 2: Flying high without a safety net

Unfortunately, extended success always takes away the main ingredients
necessary for further success: humility and patience. The longer his streak
of successful trading lasts, the more of the ingredients he loses, and feeling
smart and confident, he inevitably puts on a bigger bet without waiting for
the right trade setup. This could be due to either his own greed for a bigger
bonus or a pressure from the management, or both. Then without exception,
the market will punish him for his recklessness. Because of the bigger bet,
his loss increases exponentially. Though it wouldn’t be so bad if he had the
sense to get out quickly, his inflated ego won’t allow him to accept defeat
(cutting the loss).

Stage 3: Facing two options

As the market goes further against him, it becomes harder and harder to
admit defeat and take the loss. In desperation, he violates the cardinal rule
of trading, that is, never to add to the losing position in order to make him
whole quickly. With the violation, he quickly plummets toward the ground.
He is faced with two options. One is to suffer the impact or to find a way to
avoid it. If his firm has even the smallest crack in the internal controls, he
will be able to manipulate the system to buy some time.
Stage 4: Entering rogue territory
Instead of taking the loss, he decides to hold onto his losing position.
Worse yet, to recoup the loss quickly, he doubles up his bet if the system
allows him. With this violation of internal rules, he has entered rogue
territory. Depending on the laxity of the controls, he could keep doubling
down on his position and quickly get to the point of no return, at which
point coming forward is out of the question as it could preclude his career
while by continuing to hold the position, he remains in the game. So why
should he cut his career short?
Alas, this plan always backfires. Once he steps on the side of
impropriety, he has entered a race against time. Even during those 12 years
I was hiding my loss, I was fearful every moment of being caught. So, the
need to make a large amount of money as quickly as possible seals his fate.
In total desperation, he will continue adding to his losing position,
hoping that as soon as the market turns around, he will be made whole. So,
he is no longer the disciplined trader that he used to be but has become an
out-of-control gambler who will keep rolling the dice as long as it is
possible. Eventually, the magnitude of the loss to hide and the imminence
of discovery force him into the final blow up trade, which usually ends the
rogue activity.
There you have it. No trader will stop unauthorized trading voluntarily
before he reaches the end. The difference between the trader who loses $1
million versus $1 billion is not the level of greed or the degree of addictive
personality, but the difference in the effectiveness of the internal controls at
their respective institutions. As I said, no trader embarks on unauthorized
trading to lose billions of dollars; instead, his original goal is to cover his
original trading loss.
He simply does not relate to the trader who lost a billion dollars and got
sent to prison for eight years. All he is thinking about is to recoup his small
loss in short order and restore his status as a trader. So, at the beginning of
the rogue trading, he is confident that he can recoup the loss, to that end, he
sees no sense in coming forward. Then, as the loss snowballs, his
confidence gives way to the fear of much more severe consequences, such
as criminal prosecution. In either case, he has no choice but to continue.
Asking a trader why he didn’t come forward when the loss was still small is
like asking a battered boxer why he didn’t get out of the ring when he took
the first punch.
 The decision by the Osaka District Court to award $875 million
restitution to Daiwa Bank in the class action lawsuit by its shareholders
against the senior management was an exemplary decision and should be
emulated in other countries.
All traders experience a psychological high and the subsequent fall all
the time. Some will learn the lessons quickly but some will not and that is
where a trading manager can help them.
In trading, the key to success is to admit swiftly when you are wrong.
However, it is easier said than done, because when you are on a high, you
can’t perceive yourself being wrong. Most traders on a high tend to believe
the market is wrong, not them. A good trading manager will help successful
traders from being overconfident rather than boosting their ego.
While I have enumerated various aspects of rogue trading to enlighten
the readers, there is going to be a new regulatory regime for banks, which
may change the game somewhat.
In the aftermath of the 2008 financial crisis, lawmakers enacted the
Dodd-Frank Act to curb speculative activities by the banks.
The Gramm–Leach–Bliley Act (1999) which repealed the Glass-
Steagall Act of 1933 and the Commodity Futures Modernization Act (2000)
had been recognized as one culprit for the crisis.
The Dodd-Frank Act, particularly the Volcker Rule, prohibits
proprietary trading in banks. Commercial banking institutions are required
to end all proprietary trading by July 21, 2015. Some are hopeful that this
will prevent spectacular rogue trading losses but others are skeptical.
The problem is that when the politicians repealed the Glass-Steagall Act
and deregulated OTC (Over-The-Counter) derivatives, the regulators were
not at all ready to regulate the banks dealing in these commodities. The
incident I had back in 1989 illustrates this. After the blow-up of our $3
billion short position, one of the dealers urged the Fed to ‘check’ Daiwa.
Without the regulatory jurisdiction over the foreign banks, the Federal
Reserve Bank of New York had their examiner sit in along with the New
York State banking examiners. He was there for two days, supposedly
checking out our trading operation but apparently had no clue what to
check.
Then, in 1993, when we told the Fed that we had been concealing the
location of our trading operation, they did a thorough examination of my
trading operation at the downtown office. Though I was petrified of the idea
of the Fed examiners scrutinizing my operation specifically to find some
form of impropriety, the special banking examiner from the Federal Reserve
Bank of New York, where all U.S. Treasury securities transactions are
settled, had no knowledge of T-bond trading. What does this say about the
readiness of the regulators?
Only a few years later, they were to regulate banks engaging in credit
default swaps and other esoteric derivatives? Who is kidding whom? When
politicians enact regulations, they are so busy pleasing their constituents
that they don’t check to see if the regulators are capable of regulating such
markets. The crisis of 2008 was an inevitable outcome.
Now with the Volcker Rule, we are not exactly going back to pre-Glass-
Steagall days. Once you let your dog run free, he is not going to be the
same well-trained dog as before. Thanks to the reckless and self-serving
decisions by the politicians, the regulators will have a load of work to
police the banks from running wild again, in the new moral regime of “Too
big to fail, too big to jail.”
Nevertheless, prohibiting proprietary trading should help prevent rogue
trading at U.S. banks to a certain degree. When it comes to foreign banks
and investment banking houses, that’s another story.
Regulatory remedies notwithstanding, there are steps we can take to
prevent these astronomical unauthorized trading losses from recurring.
Rewarding rogue traders to come forward or testing the system by
challenging traders to break it may sound outrageous. However, with nearly
$700 trillion worth of derivative positions outstanding globally today, the
risk of a rogue trader causing irreparable damage to the world financial
system is real. To that end, a clear understanding of the causality of
unauthorized trading has never been more important, if we are to avert an
institutional, or even global, financial crisis.
 Endnotes
1
Collateralized Mortgage Obligations
2
aka Salomon Brothers
3
Generally, traders said “plus” to mean a half point; i.e. “11 plus” would be 11.5.
4
From The Road Not Taken by Robert Frost.
5
Get a shot: to get a penalty. If you accumulate so many penalties, you lose your privileges such as a
recreational activity or a visit.
6
Correctional Officer
7
To make another acknowledge that you have him in submission.
8
In 1990, Drexel Burnham Lambert was forced into bankruptcy by its involvement in illegal
activities in the junk bond market, driven by its employee Michael Milken.
9
BCCI was forced into closure in 1991 after investigations in the U.S. and the UK revealed massive
money laundering and other financial crimes.
10
Located in Allenwood, Pennsylvania; part of the Allenwood Federal Correctional Complex
11
Hawkins, A. (2009, July 3). America’s 10 Cushiest Prisons. Forbes Retrieved from
http://www.forbes.com/2009/07/13/best-prisons-cushiest¬madoff-personal-finance-lockups.html .
Retrieved 2/1/2014.