Mr John Rusnak, the US currency dealer at the centre of the AIB debacle may have placed currency bets worth billions of dollars trying to cover earlier losses, experts said today.
AIB have yet to disclose the full details of Mr Rusnak’s activities which cost the bank $750 million but the bank has confirmed he was trading in two foreign exchange contracts - spot forward contracts and option contracts, using the dollar and yen currencies.
Banking experts said Mr Rusnak probably had multiple investments in Japanese yen. Mr Rusnak, expecting the yen to rise in value was likely adding to his positions so that the value of the holdings was over $1 billion, the experts said.
He may have then paid large sums of money so he had the right to buy more yen using options contracts and made bets that simply proved wrong.
The bank claims he then buried the trading losses by creating fictitious options trades and by overriding internal systems designed to detect irregularities.
The size of the loss at Allfirst, which had been operating a two-man currency trading desk until this week, surprised even experts who have been in the business for decades.
"It is quite a task to lose that much money" a veteran currency trader said today. In order to lose that sum of money in a course of a year, positions would probably need to be in excess of a billion dollars at times. "It would be a large sum for this bank in particular," he added.
Financial and risk-management consultants said it would be difficult for a trader to lose $750 million undetected unless a bank's internal controls suffered a major breakdown. Banks typically have layers of checks and balances.
After a trader completes a transaction, the back-office staff confirms the trades by phone and/or fax and also reconciles cash accounts at the end of each day. A bank's risk-management team would be busy making sure traders stay within their trading limits.
If an Allfirst trader documented a fictitious option contract, as bank officials allege, the bank's back-office staff should have discovered a discrepancy on the books.
Mr Maurice Crowley, chief financial officer of Allfirst, said the bank will examine how its internal controls failed and then start to rebuild the damage to the bank's reputation.
"What is extremely disappointing for us is that 2001 had been one of our better years and we had managed to re-ignite revenue growth. The challenge now will be to maintain that momentum." Mr Crowley added.
Additional reporting by