Senate launches Daiwa inquiry

Bank in crisis: Embattled institution looks to merger as US prosecutors accuse it of cover-up

As the gravity of the latest charges in the Daiwa bond trading scandal reverberated through the American political and financial system yesterday, the US Senate prepared to hold special hearings on the affair later this month.

Federal Reserve officials, possibly including the chairman, Alan Greenspan, will be quizzed at the hearings over what exactly happened at Daiwa, why it went undetected for so long and on what steps will be taken to prevent any similar scandals.

Meanwhile, within hours of being ordered out of the US and indicted on criminal charges, Daiwa Bank was dealt a further blow with a harsh list of punitive sanctions from the Japanese government.

Japan's Ministry of Finance banned Daiwa from opening new overseas offices and ordered it to scale down its overseas lending and securities business. Deprived of a presence in the world's biggest financial centre, and with its reputation in tatters, the bank admitted that it has discussed the possibility of a merger with Sumitomo Bank.

In New York on Thursday the Federal Reserve Board and the state banking department gave the bank 90 days to close all its banking operations in the US, citing "unsafe and unsound banking practices and violations of law over an extended period of time". The order accused senior Daiwa managers of falsifying bank reports in order to conceal the losses of $1.1bn (pounds 690m), which were incurred over 11 years and finally reported on 18 September.

US prosecutors announced a 24-count criminal indictment against the bank, and arrested Masahiro Tsuda, the former general manager of its New York branch. The charges, carrying a maximum fine of $1.3bn, include conspiracy, wire and mail fraud, obstructing inspectors, falsifying records, and failure to report criminal offences.

"The message to the financial community from today's indictment should be clear and unambiguous," said Mary Jo White of the US Attorney's Office. "Law-enforcement will not tolerate financial authorities who unlawfully attempt to mislead regulatory authorities and cover up criminal misconduct by their employees," she said. Most worrying have been the lengths to which Daiwa went to conceal its breach of an order from US regulators to separate its New York branch's bond trading from other activities.

In what sounds more like a tale from the speakeasies of the Prohibition era, it is alleged that whenever US bank examiners were due to visit the downtown branch, Daiwa managers would temporarily send the traders up to the midtown office and disguise their trading floor as a store room. When the inspectors were gone, the trading desks and computers would be unwrapped and re-booted.

At his headquarters in Osaka, Daiwa's president, Takashi Kaiho, accepted the closure order, but insisted that responsibility for the losses lay entirely with Toshihide Iguchi, the New York-based trader who made the illegal trades. "Our bank is the sole victim of illicit transactions by Iguchi," he said. "We did not intend to cover it up, but our knowledge and interpretation of US laws were somewhat inadequate."