In a rare expression of contrition, Federal Reserve Board Chairman Alan Greenspan admitted Monday his examiners missed clues of wrongdoing within Daiwa Bank that concealed U.S. bond trading losses that grew to $1.1 billion.
"With a more robust follow-up, the problem might have been found sooner," Greenspan told a Senate Banking hearing on the Daiwa scandal. "Nonetheless, the bottom line is that we did not succeed in unearthing Daiwa's transgressions where we might have."Greenspan was summoned with other regulators to explain why the Federal Reserve failed to detect and more severely punish Daiwa for banking violations dating back to 1992.
FDIC Chairman Ricki Helfer offered new details about weaknesses in Daiwa's retail banking arm, Daiwa Trust, which the FDIC and state regulators examined 10 times since 1984.
"Criticisms related to inadequate policies and controls were made at each of these examinations," Helfer said.
Greenspan, Helfer and Neil D. Levin, superintendent of the New York State Banking Department, faced blunt questioning from the Senate panel.
"You've just been conned, if we can use the phrase, in a way that was devised to damage, ultimately, the investors" in Daiwa, Sen. Robert F. Bennett, R-Utah, told the regulators.
Daiwa, based in Osaka, Japan, was ordered by the Fed and other banking regulators on Nov. 2 to cease banking activities in this country within 90 days, an extraordinarily harsh punishment. It also faces a 24-count criminal indictment that accused it of covering up the trading losses. If convicted, the bank could face more than $1 billion in fines.
The scandal developed after a bond trader in Daiwa's New York branch, Toshihide Iguchi, pleaded guilty to hiding a $1.1 billion loss accumulated over 12 years.
Senate Banking Chairman Alfonse M. D'Amato, R-N.Y., was angered at revelations that Japan's Ministry of Finance waited for six weeks this summer before disclosing the losses to the Fed. Withholding of such information by Japanese regulators "is a serious breach of trust between our governments," D'Amato said.
D'Amato questioned Greenspan closely about the Fed's failure to vigorously pursue Daiwa its management lied to examiners and concealed its trading floor in its downtown office, in violation of its agreement with regulators.
"It's absolutely essential for us to ascertain how something that was so serious wasn't acted upon," D'Amato asked.
The Fed chairman said examiners told Daiwa management to fix "a number of internal control weaknesses" at Daiwa's New York branch between 1992 and 1994.
Daiwa management was told that Iguchi should no longer have responsibilities for both securities trading and accounting for such trades. But the Fed examiners did not focus on the possibility that Iguchi's dual role might be covering up the misuse of customer funds.
"There were some clues that were missed in the examination of Daiwa," Greenspan said.
The regulators also said detecting fraud within any bank is difficult and that bank regulators by necessity must rely on internal controls within a bank and the integrity of management to detect wrongdoing.
"If a bank's management is covertly misleading examiners and the bank's systems are evaluated at adequate, fraud may remain undetected, at least for some time," Helfer said.
In his first extended public comments on the Daiwa scandal, Greenspan said the Fed does not need additional powers at this time to deal with supervision of foreign banks.
Following the Bank of Credit and Commerce International bank scandal in 1991, Congress gave the Fed enhanced powers to regulate foreign banks, and kick them out of the country if necessary.
Greenspan said the severe punishment for Daiwa was necessary because it endangered public trust in the banking system.
"The potential cost to our financial system and hence to our economy is too large," Greenspan said.