Fallout From Bank Fraud

Allfirst Bank. Allied Irish Banks. John Rusnak. AP

Allied Irish Banks set a crisis board meeting on Thursday as criticism of management and market speculation of a takeover mounted after a $750 million suspected fraud at AIB's U.S. unit Allfirst.

John Rusnak, the trader at the center of the scandal which pushed down AIB's share price by some 23 percent on Wednesday in markets already shaken by the collapse of U.S. energy giant Enron Corp, said through his lawyer he was talking to federal authorities in Baltimore. He denied stealing.

The meeting at Allied Irish's plush headquarters in Dublin would try to determine "the complexity of what is involved and why the systems did not work and whether some people didn't do their job," AIB Chairman Lochlann Quinn said.

Bank officials described Rusnak as a married father of two who has worked at Allfirst since 1993. They said he was paid $85,000 a year, a modest amount for a currency trader with his experience.

AIB has said Rusnak tried to disguise huge dollar/yen foreign exchange losses at its U.S. unit Allfirst Financial Inc. in Baltimore with fictitious trades.

An AIB spokesman said he did not expect any statements after the board meeting, adding that the directors had too much work to do and "are not going to make themselves available." The bank did not say when the session would start.

The rout of AIB's shares on Wednesday wiped some $2.4 billion from its market value, pushing it into second place among Irish companies, behind rival Bank of Ireland.

Allied's shares rebounded four percent to 11.75 euros in Dublin by mid-morning Thursday on speculation it could be a takeover target and as Deutsche Bank upgraded the stock.

"The speculation is that management credibility is so badly damaged by this incident that Allied is now a more likely take-out candidate," said Daniel Garrod, pan-European banking analyst at Commerzbank in London.

The Irish press was full of commentary questioning how management could have allowed such a massive hemorrhage of money.

"Some of the questions that need to be asked will focus on the management process and some on how the bank's settlements procedures could have been subverted to such an extent," Ray Kinsella, professor of banking and finance at University College Dublin, wrote in The Irish Times.

The yen fell some 25 percent in value during the time Rusnak is alleged to have been making deals.

AIB contacted the FBI to help find Rusnak after a review by the bank raised questions about his trades.

Lawyer Bruce Lamdin told Reuters that Rusnak and his attorney David Irwin held talks with the U.S. Attorney's office in Baltimore. Lamdin denied claims that Rusnak had gone missing. "He's been home with his family, quite frankly," he said.

"My client is not a fugitive," he said. "We hope that things will take their natural course from here. That's up to the U.S. attorney's office."

The U.S. Attorney's office was not available to comment.

In the most infamous case of rogue trading, Nck Leeson, a British trader working in Singapore for Barings Bank, made unauthorized futures trades that lost more than $1 billion and led to the venerable bank's collapse in 1995. That case prompted banks worldwide to tighten internal checks.

Leeson was released from a Singapore jail in 1998 for good behavior after serving 3 1/2 years of a 6 1/2-year sentence. He claimed he did not make a cent from his disastrous trades, which were essentially a losing bet that a group of Japanese stocks would rise.

CBS News Business Correspondent Anthony Mason reports that former FBI agent Ed Stroz, who in 1995 arrested the rogue trader who lost more than a billion dollars at Daiwa Bank, said under pressure traders sometimes steal to cover their losses on bad trades.

"If you don't get it right then, the losses stack and mount and you have to take more and more to cover them hoping that someday things will turn around and you'll be able to win it back. Doesn't always happen that way. I think most of it was probably lost," said Stroz.

Irwin earlier said his client did not steal from Allied Irish. "If they're claiming that he stole money, that won't pan out. I'd be surprised if they ever came up with evidence that he stole money," he said.

The FBI told Reuters it had not issued a warrant for Rusnak, who lives with his wife, Linda, and two children in an affluent Baltimore community. Peter Gulotta, special agent for the FBI's office in Baltimore, said the FBI was conducting a bank fraud and embezzlement probe.

Allied Irish said it suspected "internal and external collusion." It stressed the bank was in no danger of collapse.

"This trader isn't bringing down this bank," said Allied Irish Group Treasurer Pat Ryan, who was sent to the United States to take over the treasury functions at Allfirst.

"Our capital base is very strong. It was able to absorb what happened. Their money is safe," he said.

AIB said Rusnak was part of a two-person foreign exchange trading operation at Allfirst that had annual revenues of less than $10 million. It did not identify the other person from that operation, but said he had not been suspended.

Allied Irish said it had halted foreign exchange trading at Allfirst and suspended several executives and confirmed that the deals had been in dollar/yen. Finance Director Gary Kennedy has said that the bank had unwound the fraudulent positions and a bank spokesman confirmed that all the positions had been closed.

Allfirst employs about 6,000 people and has about 250 branches and outlets concentrated in Maryland and Pennsylvania.


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