Lax management blamed at Allfirst

`Human failings,' brazen rogue trader are cited in report

Ludwig outlines changes

Chairman gets OK to retire, CEO stays, seven others fired

March 15, 2002|By Andrew Ratner | Andrew Ratner,SUN STAFF

DUBLIN, Ireland - A report into the trading scandal that tarnished Allfirst Financial Inc. of Baltimore painted a damning picture yesterday of a bank shop rife with lax management and verbal abuse and a Jekyll-and-Hyde trader who was so brazen he created a computer file titled "fake docs" to store his deceptions.

The report by former Comptroller of the Currency Eugene A. Ludwig didn't hold many surprises, but it did put the blame for the rogue trading that cost the bank $691.2 million no higher than middle management, including the trader at the center of the storm, John M. Rusnak.

Ludwig delivered the report to the Irish stock exchange at 7 a.m. (2 a.m. EST) yesterday and four hours later to a news conference with 200 journalists in the blond wood-paneled auditorium at the headquarters of Allied Irish Banks PLC, the parent company of Allfirst.

"It was as much a set of human tragedies as I've ever seen," said Ludwig, sitting in a private office atop Allied's headquarters here before catching a plane back to Washington after the session with the press.

His report detailed dozens of changes that Allied Irish and Allfirst should make to shore up their treasury operations. They included:

Terminating all proprietary trading at Allfirst and relocating customer trading activities to Allied's New York branch.

Requiring traders to function in a group to avoid "lone wolves."

Using more "stress testing and scenario analysts" to gauge risk in currency portfolios.

Confirming all trades immediately.

Ensuring that top executives of Allied Irish take full responsibility for the trading activities of the bank.

Mary Louise Preis, Maryland's commissioner of financial regulation, said state regulators have a copy of the report and are comparing it with their own investigation. State bank examiners are still probing bank records, she said.

The state will continue to monitor Allfirst and will make sure the bank addresses its problems.

"I think there were substantial control failures," Preis said. Ludwig's briefing, which ran two hours, drew sharp questions about the actions the board announced.

Allfirst Chairman Frank P. Bramble was given permission to retire June 1. The bank said he was fulfilling earlier plans to retire.

"This report has confirmed that Frank Bramble had no involvement in or knowledge of the improper conduct," an Allied statement said.

Susan C. Keating retained her position as chief executive officer. She will have a new boss: Eugene Sheehy, credited with building Allied's successful retail bank operation through Ireland, will become chief executive officer of AIB USA Division and executive chairman-designate of Allfirst. Sheehy was in the United States yesterday at an Allied bank ribbon-cutting, bank officials said.

Some analysts were surprised that the two top officers were not dismissed, given the size and duration of the bank's losses.

A Dublin banking analyst who follows AIB said he expects Keating to ultimately be removed. "At the end of the day, the buck stops with the chief executive," said the analyst, who requested anonymity. "It's not insignificant what happened here. In fact, it's very significant."

But with Bramble leaving, it was important that Keating remain in her post for a smooth transition and to keep Allfirst's customers calm, the analyst said. But Michael Buckley, chief executive officer of Allied Irish, said Keating was not culpable because trading was only a fraction of the responsibilities she assumed only 18 months ago.

"I don't want to be an apologist for her, but it is responsible of the board in this case not to take her out," Ludwig said.

Several analysts agreed, saying Allfirst might have wounded the U.S. franchise if it lost both Bramble and Keating simultaneously.

"The markets were asking the same question, `What about Susan Keating?' but that misses the point," said Ray Kinsella, a university business professor in Dublin who wrote a book on banking controls. "Ludwig's job was to name names and he didn't name hers."

Seven other employees of Allfirst were dismissed - without severance, the bank said - as a result of Ludwig's findings.

Allfirst Treasurer David M. Cronin and Rusnak's supervisor, Robert Ray, were the highest-ranking executives let go. Aside from Rusnak, they were the most heavily criticized figures in Ludwig's assessment and by Allied top executives yesterday.

Cronin and Ray missed enough red flags to decorate downtown Moscow because they were charmed, impressed - and ultimately overmatched - by Rusnak and his international trade maneuvers, Ludwig said.

Others who were informed Wednesday night that they are being fired were Allfirst treasury executive Jan Palmer; Lawrence Smith, whose responsibilities included verifying Rusnak's trades; and two internal audit managers, Michael Husich and Lou Slifker.

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