Imprisonment isn’t a deterrent and rogue traders shouldn’t be criminalised, argues Toshihide Iguchi, who was himself jailed after confessing to having accumulated losses of $1.1 billion through unauthorised bond trading at Daiwa Bank in New York.

In Hong Kong to promote his new book, My Billion Dollar Education: Inside the Mind of a Rogue Trader, Iguchi tells AsianInvestor that traders who confess to unauthorised positions should keep their jobs and have an opportunity to reverse their losses.

Iguchi’s trading losses rank him alongside the likes of Bruno Iksil (JP Morgan), Jérôme Kerviel (Société Générale), Nick Leeson (Barings Bank) and Kweku Adoboli (UBS). 

His actions were followed in 1996 by a then-record $350 million fine for Daiwa for its delay in reporting the unauthorised trades to US authorities, which eventually led the Japanese bank to close its US operations. Iguchi himself was sentenced to a four-year jail term in 1997.

“A rogue trader is engaged in unauthorised trades to protect his job; he does not do this to enrich himself,” states the former head of bond trading and securities custody divisions at Daiwa Bank’s New York branch.

Not punishing rogue traders to the extent that they lose their jobs would create an incentive for them to come forward, Iguchi suggests.

To prevent wrongdoing, banks should tackle the opportunistic corporate culture that drives some senior managers to turn a blind eye to unethical trading practices when traders turn a profit, and return to their core economic function of extending credit to corporations and facilitating business, he says.

“If a trader makes a mistake, or a loss, once he finds a crack in a system, he will exploit it to try to trade out of the problem,” Iguchi explains.

He adds that internal risk controls and judicial sanction do not address the core issue behind unauthorised trading: psychology.

“People often ask: 'Why do you have to wait until the losses blow up to the billions before you come forward? Why not just cut losses at the very early stage?'

"This is [counterintuitive]. No trader will try to lose more and make things worse. More often, a rogue trader is simply hoping that the next trade he makes is correct and that he will recoup his original losses,” Iguchi says.

Through his English-language memoire, in which he explores his experiences at Daiwa, Iguchi says he intends to set the record straight. He calls the federal indictment of Daiwa “the most unjust, unfair and preposterous prosecution ever”.

The indictment of Daiwa was incomprehensible, he says, as he was perpetrator and the bank was unaware of his losses, which had mounted over 12 years until he confessed to 30,000 unauthorised trades in a 30-page letter.

Regulators today prosecute “anyone as they are worried about the collateral consequences in their own financial system,” he says.

“Daiwa Bank did not cause one cent of [a] loss to anyone. It reported voluntarily after [my confession], yet it was charged with concealing losses,” he says. “That should have been just a small penalty, not a crime.”

In an opinion piece written for sister title FinanceAsia, Haymarket executive editor and former AsianInvestor editor Jame DiBiasio counters Iguchi’s stance. He argues that there can be no room for tolerance where cooking the books is concerned.

He points out that Iguchi makes no mention in his book of anyone at Daiwa losing their job except his immediate superiors. But many people were surely harmed because the bank’s overseas business was closed down, DiBiasio notes.