ANALYSIS: The John Rusnak affair has shaken the foundations of AIB and tomorrow Eugene Ludwig will deliver his report to chairman Lochlann Quinn 'This is about manipulating records. . .records at Allfirst treasury appeared not to be exceeding limits but were'

In a few years, Allfirst Bank has become a familiar part of daily life around Baltimore, Maryland. The name, spelled out in neon on top of its high corporate building, is clearly visible from the hotels and seafood restaurants of the popular harbour area.

The blue Allfirst logo with white and orange squares adorns more than 250 bank branches in Baltimore and towns in Maryland, Pennsylvania, Delaware and northern Virginia, as well as some 575 ATMs. Allfirst posters tell potential customers: "You focus on what's really important, we'll focus on helping you get it."

The image of a comfortable, well-managed family bank was shattered on February 6th when the telephones began ringing around town before dawn with the news that Michael Buckley, chief executive of parent bank AIB, had just announced in Dublin that Allfirst had lost a staggering $750 million (€856 million) through rogue trading in a treasury department few knew existed.

A chaotic midday press conference was held on the 22nd floor of the bank's headquarters by AIB's US chief executive, Frank Bramble, Allfirst president and chief executive, Susan Keating, and AIB group treasurer Pat Ryan, whose soft Irish accent proved difficult for the American reporters.

For once the hackneyed term "ashen-faced" was appropriate. The bankers said the losses had been discovered the previous weekend after a treasury official became suspicious of trader John Rusnak working in their "very small" foreign exchange trading office. The losses had occurred even though he was "operating within his limits".

Mr Rusnak had not shown up for work on Monday after they discovered that some of the option agreements he had put in place to cover foreign exchange contracts were fraudulent and they had "lost contact" with him, but the FBI was on the job.

"He found a way to crack our internal control systems," said Mr Bramble, adding that there was possible collusion. Four officials had been suspended: David Cronin, bank treasurer and executive vice-president; Robert Ray, senior vice-president of treasury funds management; Jan Palmer, senior vice-president of investment operations and Mr Rusnak's immediate boss; and Larry Smith, a clerk in the bank's operations unit - although there was no suggestion that any were involved in the fraud.

Mr Rusnak, it later transpired, had not strayed far from his rambling Victorian frame house in Baltimore and has since claimed to friends that, far from being a fugitive, he had telephoned the security officer at the bank at 5 p.m. on Tuesday, the day before the press conference, to say he had hired a lawyer. Allfirst had no comment when asked about the call this week.

In Dublin, Mr Buckley said that the controls in place at Allfirst were "up to the best international standards" but as Ms Keating told the Baltimore press conference, there was "a breakdown in the whole control system".

As the Federal Reserve, Maryland bank regulators and the FBI began inquiries, AIB commissioned Eugene Ludwig, one-time US Comptroller of the Currency, to carry out an independent investigation.

Mr Ludwig's former office had experience of Allfirst before. As US bank regulator, it had fined the AIB-owned bank, then called First National Bank of Maryland, $950,000 in January 1992 for failing to file reports on 111 currency transactions of more than $10,000 each.

As Mr Ludwig's team began delving into Mr Rusnak's arcane currency trades, some uncomfortable facts began emerging. The control system had in fact failed for five years, AIB said. During this time, Mr Rusnak had made some 14 fake options contracts totalling hundreds of millions of dollars to hide mounting losses. In 1997 he had gambled away $29.1 million but managed to roll over and hide the losses.

Far from operating within his limits, the trader in the "very small" treasury operation at Allfirst would eventually be moving currency markets around the world as he upped the ante to cover his losses.

The fact that he exceeded his limits was in fact not news to Allfirst supervisors. The Wall Street Journal uncovered a 1999 memo (verified by an Allfirst official) stating that a modified risk measurement system had been installed in Mr Rusnak's computer in an effort to "hopefully avoid future over-limit situations". This was not however taken as a sign something was wrong.

"Traders always like to have bigger limits," Mr Ryan had remarked dryly to journalists.

Mr Rusnak had a daily value-at-risk limit - the maximum amount his currency portfolio could lose in a given period - of $2.5 million to $3 million, but had sometimes been exceeding the limit by up to $1 million. The rate was set by Mr Ryan but otherwise the AIB group treasurer left control of the Baltimore trading desk to Mr Cronin, a long-standing colleague.

By 2001 the trader was making "deep-in-the-money" trades, which risked tens of millions to raise cash to cover accelerating losses. Some $211 million had gone down the drain in 2000 alone.

A major US bank raised one huge trade with AIB officials in Dublin early in 2001 when Mr Rusnak tried to get out of it to avoid bigger losses, an executive at the US bank said, and the word went back from Dublin to Baltimore to settle it.

The amounts involved were breath-taking. Sources close to the investigation say Mr Rusnak has spoken of one huge hedge made overnight in mid-2001 with Citibank, Singapore, in which $1.5 billion was put in play. Citibank declined to comment.

The trader became such a significant player in the international money markets that dealers at major banks courted him for trade.

AIB executives said they knew nothing of what was going on.

"This is about manipulating records. . . records at Allfirst treasury appeared not to be exceeding limits but were," said Mr Buckley, who once encountered Mr Rusnak in the company of several other Allfirst officials on a visit to Baltimore not long before September 11th but did not raise trading issues with him.

The big deep-in-the-money deals Mr Rusnak made in 2001 went catastrophically wrong and he lost another $373.3 million of Allfirst's money. In January 2002 he dropped a further $17.2 million. He had to try to get more of the bank's money.

It was his insistence that the bank allow him more cash - "if you reduce my exposure I can't trade" he complained - that prompted a treasury official to go back over his trades and discover the catastrophic fraud, Allfirst officials said.

It was a staggering blow to the Baltimore bank. "We couldn't get our heads around the fact that it was so big," said a senior Allfirst executive.

Mr Rusnak's lawyer David Irwin said that his client had not stolen the money and it would turn out to be less than $750 million: it was in fact revised down by the bank to $691.2 million.

Tomorrow Mr Ludwig will deliver his report to AIB chairman Mr Lochlann Quinn, and shareholders may get answers to some of the questions swirling around: How were the controls evaded? How could counterfeit options be missed by the back office that is supposed to match them with counter parties every day? Were the records that showed Allfirst was within the limits set by AIB manipulated by Mr Rusnak or his supervisors? Did they show net figures posing as gross or worse? How often were they supplied to AIB? Were AIB executives in Dublin watching these figures closely and if so why? And if not, why not? And will Mr Rusnak's testimony to the FBI - particularly about who knew what and when - be available to Mr Ludwig and taken into account, or dismissed as the evidence of someone who has been discredited? Has documentary or e-mail evidence been found by investigators that could shed light on what was going on? Has a "colluder" been found in another bank?

When asked on February 6th if Mr Rusnak was another Nick Leeson - a reference to the rogue trader at Barings Bank in Singapore - Mr Ryan snapped: "In no way is it like that - he brought down a bank". But it was like that in almost every other respect and, while Mr Rusnak has not brought down Allfirst or AIB, the careers of some senior executives hang by a thread this weekend.