Rogue Trader John Rusnak Massive Trading Losses revealed

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Haven't we all heard the Nick Leeson story one time too many? Let's see, there was the unauthorized biography, then the ghost-written how-I-did-it and even a celluloid treatment, with Ewan McGregor playing the Rogue Trader. Apparently some of the folks at Allied Irish, Ireland's biggest bank, needed another telling of the tale to drive home the message that inadequately supervised traders can threaten even the most venerable institutions. So last week we got the real-life reenactment: Allied Irish alleged that John Rusnak, 37, a currency trader at Allfirst, its U.S. unit in Baltimore, had piled up losses of $750 million over the course of a year, hiding them in fictitious transactions. Even the original rogue trader admitted that the copycat's performance was authentic. "The similarities," Leeson told the BBC, "seem to be very striking."

Striking? More like creepy: a preppy trader at a remote outpost of a mid-sized European bank loses hundreds of millions by gambling on the financial markets while his superiors remain clueless for months. When he can no longer hide the losses, the trader disappears. At this point the stories diverge. Unlike Leeson, who fled from his Singapore base to Borneo and then to Frankfurt, Rusnak never left town and, his lawyers insist, was not a fugitive. The other difference: seven years ago, Leeson's losses of $1.3 billion from dodgy derivatives deals were large enough to bankrupt his employer, Barings Bank; it was taken over by the Dutch group ING. Allied Irish, in contrast, can take Rusnak's $750 million hit — that's less than 10% of its equity capital — but the drain on its resources makes it vulnerable to takeover attempts.

While Allied Irish was measuring the damage to its bottom line and its reputation, traders everywhere were coming under closer scrutiny from nervous supervisors. Most worrying for banks and their regulators is that Rusnak may have used the exact same method as Leeson: when he began to pile up losses in currency trades, he allegedly hid these by fabricating other deals that, on paper, showed him making profits. Leeson was able to conceal his activities for two years because, like many traders at the time, he was authorized both to make and to settle his deals. In the aftermath of the Barings debacle, banks separated the two functions, obliging the back office to double-check trades with the counterparties, often within 48 hours of a trade. How, then, could someone like Rusnak get away with doing a Leeson?

Allied Irish said it was investigating the possibility the trader had colluded with others, within the bank or outside. It also suspended five senior executives at Allfirst, though it hasn't accused them of wrongdoing. "Clearly, controls broke down," said Susan Keating, president of the Baltimore unit, "and we don't wholly understand how." Her boss in Dublin, Allied Irish chief executive Michael Buckley, suggested that no controls could hold back a trader determined to commit fraud. "You have a wonderful alarm system in your house," he said, "but someone who has a reasonable amount of skill and a certain amount of knowledge about what happens inside the house can still find a way to break in."

But clearly nobody was paying enough attention when, at some point last year, Rusnak began to run up losses. He seems to have bet that the yen would strengthen against the U.S. dollar, but the exact opposite happened. Normally, currency traders reduce such risks by buying options to hedge their positions; in Rusnak's case, he would have had to enter into options contracts for dollars. But the options he is said to have bought turned out to be fakes.

It wasn't until early this month that Allfirst began to question Rusnak about some of his deals. The alarm bells began to go off on Sunday, Feb. 3 when, according to Allfirst's chief financial officer Maurice Crowley, officials checking "certain transactions, which purported to be done with institutions in the Far East," called the institutions. "Of course, those transactions proved to be fictitious," Crowley says. When Rusnak failed to show up for work on Monday, some officials went to his house: he wasn't there. Keating phoned Buckley in Dublin later that day. By the time the fbi was called in on Tuesday, Keating and Buckley knew they had a world-class scandal on their hands. "This is a heavy blow," Buckley said. "It has damaged our credibility. I would be a liar if I said it hadn't."

The news, when it broke, was greeted with astonishment in the Baltimore suburb of Mount Washington, where Rusnak's neighbors had only kind words for him. He certainly doesn't fit the stereotype of a brash young Master of the Universe. His career had been steady rather than spectacular. After a long stint at Chemical Bank (now part of JP Morgan Chase), he joined Allfirst in 1993 and scarcely made a ripple. He was "not in any sense a star trader," Buckley said. His personal life was equally unremarkable. Married with two kids and a Labrador, he attended services at the Shrine of the Sacred Heart Catholic Church and is on the board of a nonprofit ceramic-arts education organization.

It is still not clear whether Rusnak gained personally from his dealings. In any case, he would not be the first trader to hide losses for long in the hope of making good eventually. Buckley said there was "no doubt Rusnak was involved in fraudulent activity," but conceded that "whether or not he benefited from that is still the question." An official in the U.S. Attorney's office told the Baltimore Sun that "it doesn't appear to be an embezzlement case."

At this early stage, it's hard to say what will come of John Rusnak. Bruce Lamdin, his co-counsel, said his client had "made himself available to the FBI." If Rusnak's story continues to parallel Leeson's, there could be some jail time, followed by mid-ranking celebrity. There could be biographies, autobiographies and who knows, maybe even Rogue Trader II.