Honesty essential as Allfirst faces crisis, experts say

Keeping customers informed might avoid public relations disaster

February 08, 2002|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Banking experts have some advice for executives running Allfirst Financial Inc.: Don't hide and, above all, keep consumers and investors in the loop while investigating the currency trading that cost the bank $750 million.

Otherwise, the Baltimore-based subsidiary of Allied Irish Banks PLC could find itself in the midst of a worsening public relations nightmare.

On Wednesday, Allfirst said trader John Michael Rusnak made bad bets in the foreign currency market, then tried to cover the losses with fake transactions. As of yesterday, Rusnak, 37, of Mount Washington, had not been charged with any crime.

Now, the bank finds itself with not only a staggering financial loss but also an embarrassing breakdown in its internal controls that could ultimately tarnish what is by most accounts a solid reputation, experts said yesterday.

"Allfirst ... has some work to do in restoring the confidence of investors and of customers," said Phil Cogan, executive vice president of Bernstein Communications Inc., a national crisis management firm. "These are not problems you can spin away; no amount of spin-doctoring will suffice.

"It's got to be open disclosure. Honesty has got to be at the forefront of what governs their communications and their actions. The public, the regulators ... and the entire financing community are expecting nothing less than the truth. Otherwise, the hole gets deeper."

When communicating with the public, it will be important for Allfirst to explain how a system of checks and balances broke down and might have allowed phony transactions to be entered into the system to cover up losses.

"The question that has to be answered is what types of checks and balances existed and why didn't the existing checks and balances, and accountants and computerized checks, catch this before," Cogan said.

The bank may well present itself as a victim, said Thomas P. Vartanian, chairman of the financial institutions practice at Fried Frank's Washington office.

"You can never control and know what all employees are going to do," Vartanian said. "But bank as victim only goes so far."

For a bank, managing a crisis well means satisfying regulators by conducting an internal investigation to determine if a loss occurred through a criminal act or because of the bank's own systems. Then the bank must show willingness to fix the problem, "no matter what is involved in fixing the problem," Vartanian said.

But the bank needs to pay equal attention to investors and customers.

"Investors want to see that you're satisfying regulators but are also very interested in whether this is a symptom of a larger problem or an isolated issue," Vartanian said. "Is this a one-time aberration, where a well-run bank has a problem like any in the country?"

The bank could use the crisis as an opportunity to talk to its customers and even market itself, experts said.

"If you handle it correctly and openly and let the customer know you're there to help them, no matter what happens, you can turn this into a marketing opportunity," Vartanian said.

If Allfirst can take such steps, the bank fraud case will likely be largely forgotten in coming months, consultants said.

Allfirst, which once operated as First National Bank of Maryland, "has been a good, solid bank," said Bert Ely of Ely & Co., a banking consultant firm based in Alexandria, Va. "If this comes across as an isolated event, the rogue trader and that's all that happened, my sense is the problem will fade fairly quickly. I doubt if many people will be taking their money out of the bank because of this."

Susan C. Keating, Allfirst Financial's president and chief executive officer, said Wednesday that none of Allfirst's customers or customer accounts were affected by the loss.

"It looks like it knocked out a quarter of its capital, but it is still well-capitalized after that," Ely said. "Is this going to cause the bank to fail? No, it's fine. It's painful financially but still well-capitalized. If necessary, Allied Irish will dump some capital into it."

Allfirst might be able to recover some of the loss through insurance.

Ely said most banks have a bankers blanket bond policy, which covers employee dishonesty, though large banks have customized policies that determine what gets covered and what doesn't.

George Freibert, a former bank examiner and chairman of Professional Bank Services Inc., a bank consulting and investigative firm in Louisville, said Allfirst will likely "spin it on the side of fraud."

"If you can show it was fraudulent, then you have got the possibility of recovering under your insurance policy," typically fidelity bond insurance, Freibert said. "If it is deemed that it is bad judgment or a trader simply violated an internal policy, they are probably not going to get coverage."

But if "the trader was not properly controlled by the institution, and it wasn't criminal, then they may well not have fidelity bond coverage but they may have some other kind of insurance."

Sun staff writer Bill Atkinson contributed to this article.

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