Less than 5 percent of unauthorized financial trading cases may have been reported, said Toshihide Iguchi, whose trading losses led to the 1995 shutdown of Daiwa Bank Holdings Inc.’s U.S. operations.
Allowing traders to “walk away with a clean slate” instead of being fired for losses would reduce their incentives to engage in unauthorized trades, the now 63-year-old Kobe, Japan native, who confessed to amassing $1.1 billion of losses in 1995, said in an interview in Hong Kong yesterday.
Financial institutions including Barings Plc, Daiwa, Societe Generale SA (GLE) and JPMorgan Chase & Co. (JPM) have been hit by rogue trading since 1995. The magnitude of losses have grown from Barings trader Nick Leeson’s $1.4 billion to the 4.9 billion euros ($6.8 billion) blamed on Societe Generale trader Jerome Kerviel and Bruno Iksil’s $6.2 billion losses at JPMorgan.
“Rogue trading is still alive and well and actually getting worse,” Iguchi said in the interview.
Iguchi confessed in 1995 to more than 30,000 unauthorized trades over 12 years as a New York-based employee of the bank, after Leeson went missing from Barings’s Singapore office. Like most rogue traders before Iksil, he went to prison, serving four years in the U.S. for fraud and falsifying documents. He once was imprisoned alongside Ramzi Yousef, the convicted mastermind of the 1993 World Trade Center bombings, he said.
Punishing so-called rogue traders by imprisonment, as if they were common thieves, has failed to deter further unauthorized trading and diverted public attention from the ``real'' culprit of such incidents, Iguchi said.
Unlike Bernard Madoff, the financier serving a 150-year prison term for running a $17.5 billion ponzi scheme, rogue traders lack criminal intent and are not driven by greed, Iguchi said.
Rogue traders are often emboldened by initial successes to place bigger wagers, he said. They engage in unauthorized trades in attempts to recover initial losses and protect their careers, he said.
Iguchi, who was in charge of a department holding client securities in custody for several years before being given the additional trading role, initially made a $70,000 loss from trading floating-rate notes, he said.
Iguchi said a corporate culture that is focused on profitability is “the core problem.”
“All traders would lose money at some point,” he said. “When they lose money, the natural instinct for any trader is to hide the loss.”
The profit pressure has also led executives of subsidiaries or branches to compromise risk controls, he said.
“A desperate trader can find tiny, tiny cracks,” Iguchi said at a seminar in Hong Kong yesterday. “There are always weaknesses in the internal control system.”
Supervisors with a good rapport with traders may be able to spot behavioral changes in rogue traders, Iguchi said. More importantly, financial institutions should encourage traders to come forward with their losses, added Iguchi, who described the 12 years of living in constant fear of being discovered worse than imprisonment.
“Right now, if they come forward, they figure they would be fired with stigma and never work in this industry again,” he said. “A trader can lose everything he’s worked for so hard. It’s just too much of a penalty.”
The son of a Japanese exporter and a housewife moved back to Kobe in 2007 where he started a company developing educational software and has also been a writer, he said.
Iguchi published a Japanese-language memoir in 1997 called “Confession,” as a gesture of contrition. Inspired by more recent events, he wrote the English-language book “My Billion Dollar Education: Inside the Mind of a Rogue Trader.”
To contact the reporter on this story: Bei Hu in Hong Kong at firstname.lastname@example.org
To contact the editors responsible for this story: Andreea Papuc at email@example.com Tomoko Yamazaki, Iain McDonald