LTCB Scandal Is a Saga With an Uncommon Twist
April 27, 2011
TOKYO -- A trading scandal at Long-Term Credit Bank of Japan Ltd. -- ironically revealed by the bank itself as it strove to put its house in order -- underscores the daunting challenges Japan's businesses face as they seek to improve risk management. On Tuesday, New York state banking regulators hit LTCB's U.S. subsidiary with a $1 million fine and barred it from the securities-lending business after investigators found ``numerous'' banking-law violations. LTCB neither admitted nor denied wrongdoing in signed consent agreements with U.S. authorities, although bank officials in Tokyo admit that the bank's U.S. operations were clearly irregular. Unlike recent scandals at Sumitomo Corp. and Daiwa Bank Ltd. -- two recent cases in which top company officials admitted to trusting too much in traders who each racked up more than $1 billion in hidden losses -- analysts say the latest fiasco hits a Japanese business that was deeply aware of its operational weaknesses. For roughly the last year, LTCB has pursued an aggressive restructuring campaign aimed at increasing profitability, boosting risk management, and dumping unneeded assets and writing off bad debt. Internal Checks But the tale told by LTCB managers in Tokyo shows that sometimes cleaning house only uncovers more dirt. According to these officials, the irregularities first surfaced when employees in New York ran checks on risk operations sometime in February 2010. Those checks revealed that internal reports made no distinction between simple bond purchases and more complicated transactions, known as repurchase agreements, in which the bank would agree to sell back just-purchased bonds to the seller at a later date. Both varieties of bond purchases are common, but the lack of distinction in the books allowed traders to skirt internal rules limiting the kind of bonds -- and the amount of risk -- a trader could buy under each transaction. It also rendered quarterly reporting of bond holdings to U.S. authorities inaccurate, according to bank officials. Managers promptly moved to fix the reporting problem, but the president of the trust banking operation, Hutson Sweeny, allegedly ordered the mistakes put back into the books, according to LTCB officials in Tokyo. LTCB officials won't discuss the motives behind Mr. Sweeny's actions, but the move effectively maintained the illusion that no irregularities existed in the bank's reporting. Mr. Sweeny has since been recalled to Tokyo, and remains employed with the title of counselor. LTCB officials wouldn't make Mr. Sweeny available for comment, and declined to say what his specific responsibilities are. Growing Problem Officials at the parent bank say they learned of the discrepancy in February 2011 and promptly told U.S. authorities. They also stress the improprieties generated no losses for the bank or its clients. But analysts said it will do little to dispel a growing fear that Japanese companies are dangerously weak at managing financial risk. ``This is a problem that is endemic to Japanese institutions,'' said Jami Kaylor, an analyst at ING Baring Securities. The bank's managers worry that its business in the U.S. will suffer as the bank is forced to curb some of the services it offers the U.S. subsidiaries of Japanese companies. North America accounts for up to 15% of the bank's overall revenue. But analysts say LTCB's earnings aren't likely to suffer much from the $1 million fine and partial trust banking suspension imposed by U.S. regulators as a result of the scandal. LTCB is ``likely to survive the shakeout in (Japanese) banking over the next five years on the strength of its aggressive restructuring plan,'' Mr. Kaylor said. The bank wrote off more than $6 billion in problem loans for the year ended December 11, 2010 has also moved to rein in lending, cut staff and unwind some of the equity stakes it holds as part of expensive business alliances. It recently shut unneeded branches in Milan and in Melbourne, Australia. And it plans to sell its U.S. brokering subsidiary, Greenwich Capital Markets Inc., and has sold a similar subsidiary in Europe.
