Risk Management MIA

By Sean Gallagher  |  Posted 2002-03-12 Print this article Print

Allfirst Financial ran its currency trading desk without much of the software that was standard at its corporate parent, Allied Irish Banks. Was that a $690 million mistake?

Risk Management MIA

Yet another piece of AIB's standard currency trading system was missing from the Allfirst equation—its risk-management analytics software.

Back-office and front-office systems feed data into risk analysis software, so that a company's losses on trading positions and investments are minimized. By calculating the risk on known trades, a firm can cover its risks with countervailing trades in currency options and derivatives.

In 1998, AIB started installing Askari's RiskBook software to perform this function; Askari has since been acquired by financial services company State Street Corp., and the product is now marketed under the name TruView.

Allfirst apparently was not part of the RiskBook rollout. Instead, the bank was using somewhat less sophisticated software for risk management. The company holds licenses for desktop-based software from MB Risk Management, a risk management consultancy in the U.K., according to that company. Allied, though, will not confirm whether that software was being used by Allfirst recently.

According to a recent report in Institutional Investor Newsletters' Derivatives Week, Rusnak himself was seeking new risk management software for Allfirst a year ago but didn't complete the purchase because of budget constraints.

The missing software wasn't fatal by itself—but it magnified deeper problems in Allfirst's operation: the ability for a motivated human being to take advantage of weaknesses in its systems. "Clearly there's a human element in the breakdown of procedures," says Harvey.

Despite the company's contention that no one was aware anything was wrong with Rusnak's trading positions until late last year, outside experts expect co-workers or managers had a clue something was going on.

"These things don't happen in isolation," says Williams. "There were other people sitting on that desk who knew what he was doing. These guys are such braggers, usually."

Indeed, Rusnak may have relied on his closeness to others within the Baltimore office of Allfirst to hide how big a risk he was actually taking.

"There were only two individuals managing this derivative portfolio," says Haluk Unal, a visiting scholar at the Federal Deposit Insurance Corp. and a professor at the University of Maryland's R.H. Smith School of Business. "It was a very close, tight operation."

AIB plans to release the results of its internal investigation sometime in March. However, the bank has already ceased currency trading operations in Baltimore. There are no signs they will ever resume.

Sean Gallagher is editor of Ziff Davis Internet's enterprise verticals group. Previously, Gallagher was technology editor for Baseline, before joining Ziff Davis, he was editorial director of Fawcette Technical Publications' enterprise developer publications group, and the Labs managing editor of CMP's InformationWeek. A former naval officer and former systems integrator, Gallagher lives and works in Baltimore, Maryland.

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