Allfirst traders seemed to forget the '90s ended

As others slowed foreign money deals, local bank raced on

February 10, 2002|By Will Englund and Andrew Ratner | Will Englund and Andrew Ratner,SUN STAFF

Allfirst Bank is finding out the hard way that it isn't the 1990s anymore.

Currency trading might have been a fairly obscure line of banking back then, but it was a place for young men who were brimming with confidence, were quick on the keyboard, and willing and able to risk large amounts of money on infinitesimal swings in international exchange rates.

They were swashbucklers of finance who weren't afraid to bet the bank and who could destroy the finances of smaller nations - Thailand, for instance, or Malaysia or Indonesia - without remorse.

Currency trading offered banks a way to take risks and fish for high returns; for bankers, it was an exciting break with the staid and respectable traditions of the business. Banks traded currencies on the spot; they traded currencies in the future; they traded options that would let them trade currencies in the future.

And somehow - even as the financial world began to change over the past few years - Allfirst and its two-man foreign exchange department just kept going.

Other regional banks pulled back and slowed down. They stopped betting so much of their own money. It was too volatile. Wall Street analysts reinforced that message.

But Allfirst kept getting deeper into foreign-exchange contracts. From $3.5 billion in 1999, to $4.9 billion last year, it kept the money moving. This was way more than most banks its size were dealing with. What Allfirst officials didn't realize until last week was just how much of a risk they had taken, because, they say, the loss of $750 million last year had been obscured by phony paperwork.

But if there was fraud, it was in the cover-up and not the loss. John M. Rusnak, the currency trader now at the center of a federal investigation, appears to have played the game as he learned it in the 1990s - and squandered three-quarters of a billion dollars in the process.

Top officials at Allfirst said last week that the news had come as a complete surprise. Allfirst Chairman Frank P. Bramble got a call on his car phone Monday afternoon alerting him to trouble. "I think we have a serious situation," Susan C. Keating, CEO of the bank, told him.

Bramble headed straight back to the bank, where the treasurer reported that bogus transactions were found in the foreign-exchange operation. "It was a significant amount," Bramble said. "I was staggered by it."

Rude awakening

The news that day was no less staggering to the management of their parent company, Allied Irish Banks PLC.

Allied, one of the two big banks in Ireland, has its own happy memories of the 1990s, when Ireland boomed and the bank established itself as a respected and modern presence on the world financial scene. But the past two years have brought contraction and rumblings of a possible takeover. When the wake-up call came from Baltimore, the Dubliners could barely believe it.

Gary Kennedy, the executive in charge of financial operations, including the trading activities, was putting his 10-year-old daughter to bed and hoping to coax his 12-year-old son to go to sleep, too, when the phone rang last Monday at 9:30 p.m. at his Dublin home.

"I've just got a phone call with some very bad news from the United States," the bank's chief executive, Michael Buckley, told him. Kennedy had no idea what was coming next.

Buckley said he had just received a call from Keating, who told him what had been uncovered. Buckley wasn't screaming. It was more a tone of shock, surprise, concern. He and Kennedy had worked together for years, but they had never been through anything this bad and this huge. They needed a plan, and quickly, before word leaked and affected the market.

Kennedy went to sleep at 1 that morning, tossed and turned and woke up for good an hour and a half later. He, Buckley and a handful of other top executives of Allied Irish met after 7 that morning, shuttling between Buckley's and Kennedy's offices.

The executive suite atop Allied's campus of low-rise, modern buildings reflects what one Dublin economist called "Ireland's sexier bank." The walls aren't lined with scowling portraits of long-deceased bank founders, though the institution's roots date back more than a century. Big, bold-color landscapes and contemporary oil paintings fill the corridors, culled from the company's collection of 1,000 works of art.

They decided on a three-part plan. First was to halt trading immediately to contain the damage, the size of which was still unknown. Second was to suspend several executives in the trading area at Allfirst - not to punish them, Kennedy reasoned, but to gain their cooperation in the investigation without compromising the probe. And third was to dispatch a group on the first flight to Baltimore. Leading the contingent was the corporation's chief risk officer, Pat Ryan, whose announced retirement would have to wait.

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