STORY OF THE WEEK: Having wasted little time in flying to the US as AIB's troubleshooter, Mr Eugene Sheehy is confronted with the task of restoring shattered morale in Allfirst bank and coping with the continuing fall-out from the $691.2 million (€784 million) trading losses run up by trader Mr John Rusnak.

The 31-year AIB veteran was appointed executive chairman of Allfirst and chief executive of AIB US in the wake of the Ludwig report last week and is already at work in Allfirst headquarters in Baltimore.

The publication of the report is far from the end of the matter. Allfirst is the subject of continuing on-site investigations by the Federal Reserve Bank and Maryland banking regulators, which could result in large fines, and by the FBI, which is compiling a dossier to determine what charges might be brought against Mr Rusnak or other bank staff.

Nor is the firing of seven staff members, including Allfirst vice-president and treasurer, Mr David Cronin, likely to be the end of disruptive staff changes at the bank's 22-storey headquarters in South Charles St. The Ludwig report recommended the transfer of the senior staff member in charge of risk management at the bank and said a new head of the risk assessment group should be hired.

Mr Sheehy's arrival as executive chairman also redefines the once-leading role of Ms Susan Keating, Allfirst president and chief executive. Before the debacle, Ms Keating ran the bank while the chairman, Mr Frank Bramble, stood back from day-to-day operations.

It is clear that AIB has sent Mr Sheehy to take charge. Mr Bramble is still at the bank but is taking early retirement on June 1st.

"There are serious morale problems. Spirits at the bank are very damaged over what's happened," said a former Allfirst executive.

Morale problems have plagued the bank for years. When Mr Bramble came from Maryland National Bank (MNC) in 1994 after long-serving chief executive Mr Charles Cole retired, he replaced a number of the existing management team with executives from MNC.

These included Ms Keating; chief financial officer Mr Jerome Evans; trust company head Mr Walter Fatzinger and Mr Jeffrey Maddox, head of acquisitions and strategy.

According to another former employee, the new team shook up the conservative culture at the Baltimore bank, which had earned a reputation as a community-oriented institution with an astonishing 20 per cent growth rate during the late 1980s and early 1990s, a time of recession, enabling it to help sustain AIB stock.

Those are remembered as the bank's best days, when the trading operation was a modest affair set up by a Dublin executive - commemorated in Peter's Pour House pub with a little plaque dated 1986 stating: "Joe O'Sullivan drank here" and continuing in Irish "we shall never see his like again".

The new team was known internally as the "Big Yahoos from MNC" who "wanted to show us what banking was all about", the former employee said.

However, most of Mr Bramble's appointees, apart from Ms Keating, subsequently left the bank, which was further weakened by a succession of short-term appointments and part-time officers.

Allfirst bought Dauphine Deposit bank in Harrisburg, Pennsylvania, in 1997, increasing its assets by 55 per cent, but soaring expectations were not realised and the bank's momentum slowed, with cost-cutting reinforced to make up for under-performance.

"Allfirst lost its way in the late 1990s," said a source closely familiar with the working of the bank in recent years.

"AIB viewed the management as weak for a number of years and only recently, under the direction of Michael Buckley, moved to support the team with a number of senior executives from Dublin." (Mr Maurice Crowley arrived in mid-2001 to take over as chief financial officer.)

There was also said to be disquiet in the bank three years ago at the decision, under Mr Bramble and former chairman Mr Jerry Casey, to transfer the institution from a federal to a state charter.

This made Allfirst the largest bank in Maryland to be regulated at state level rather than by the Office of the Comptroller of Currency (OCC) in Washington.

"The OCC had always kept a very close watch on Allfirst as it understood the distant parent did not have operational control," the source said.

Maryland state regulators had little prior experience at that level and were understaffed.

It will be difficult for Ms Keating to restore morale at Allfirst, especially when many people in the business in Baltimore are "baffled" that she was allowed to retain her post after the loss of $691 million, according to a prominent local financial executive.

At the same time, Ms Keating has many fans in Baltimore's business world where she and Mr Bramble were considered good civic leaders.

"The perception is that AIB, who made a major purchase of half a billion dollars in this country, sort of let this thing slide," said Mr Lew Sosnowik, a banking analyst with Koonce Securities in Bethesda, Maryland.

Day-to-day account business would not be affected, as ordinary account holders "don't pay that much attention, they don't know what currency trading is and they're not going to worry about it", he said.

But knowledgable people knew the extent of the damage. "There's no way to wash things over" and AIB would "probably let memories fade" and then sell Allfirst.

"In all fairness to the new man arriving, he doesn't know the economic landscape here. He should find somebody local who's really talented to help run the bank," said the financial executive, referring to the task facing Mr Sheehy.

"There should be a clean sweep at the top of Allfirst and good strong new people put in place to go forward, for future sale. With $691 million capital gone and a damaged reputation, the betting in Baltimore is that it will be sold in a year."

An ideal purchaser would treat the franchise as an asset rather than an investment, should be knowledgable about US banking law and lore, and be committed to restoring the dignity and reputation the bank once enjoyed, said the former employee.

Rumours about AIB's future have also reverberated in the wider US business world.

"We are hearing of take-over attempts, that means that anyone doing business with them have to worry about the long-term relationship," said Mr Bill Flynn, chairman of Mutual of America in New York.

Mr Flynn said he was "frankly puzzled" by the affair. The "lack of sophistication" shown was a surprise after many years when the sophistication of Irish business had impressed Americans.

"People are taken aback by the very poor controls that they had in the AIB situation. Somebody dropped the ball. Everybody was thought to be so bright and business-like and now we see these things to show that they are fallible also," said Mr Denis Kelleher, chief executive of Wall St Access in New York.

"It's been damaging to AIB but not to the financial sector in Ireland generally," said Mr Peter Hooper, president of Hooper Associates in White Plains, New York.

"In six months time people will remember the rogue trader, that will be it."

The preoccupation with post-September 11th and Enron has distracted US and Irish-American business leaders from dwelling on AIB, said Mr Ted Smyth, senior vice-president of corporate affairs at Heinz in Pittsburgh.

"They basically lost interest when it became clear it was not another Barings and that the bank's future was not in doubt."