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Fed has blame for Daiwa woes, ex-officials say


NEW YORK -- Nearly two years before Daiwa Bank Ltd. revealed that an employee in New York had lost more than $1 billion in unauthorized bond trades, the president of the Federal Reserve Bank of New York met with a top bank executive to discuss the employee by name and express concern about his trading practices, according to a former senior Fed official who was at the meeting.

The Fed president, William J. McDonough, ordered the practices ended and won assurances from the Daiwa executive that supervision would be tightened in the New York office, the former official said.

But while Mr. McDonough and others at the Fed had the employee in their sights, the official said, they failed to ask the right questions and engage in the kind of follow-up that would have exposed the debacle in 1993.

The former official's account of the previously undisclosed meeting comes a week after U.S. regulators accused their Japanese counterparts of shoddy supervision in the case and publicly scolded them for waiting more than a month to tell them of the losses after learning of them in August.

But a share of the scolding needs to be aimed at the Fed itself, the former official says, citing the meeting Oct. 4, 1993, and other undisclosed meetings between Fed officials and Daiwa executives. Another former senior Fed official knowledgeable about the meetings agreed with that assessment.

The Fed expressed some general concerns about the activities at Daiwa Bank as early as 1992. But the new account shows that the Fed's concerns were broader and more detailed and reached to higher levels, yet still did not prompt extensive follow-up action.

Among other things, the Fed could have closely examined the trading records of the Daiwa employee, Toshihide Iguchi, which would have ultimately led them to find that he was selling the bank's own bonds, the officials said.

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