Analysts blame human nature in recurring frauds


In 1995, a 28-year-old stock derivatives trader named Nick Leeson, working in the Singapore office of Britain's Barings PLC, ran up $1.4 billion in losses before his company finally caught on and went after him.

But it was too late. The losses were so huge they brought down the 232-year-old institution.

That same year, a trader at Daiwa Bank in Japan, Toshihide Iguchi, was implicated in $1.1 billion in losses from unauthorized bond trading over a decade.

A year later, losses accumulated by Yasuo Hamanaka, a star trader at Japan's Sumitomo Corp. who had tried to manipulate the copper market for 11 years, ballooned to $2.6 billion before his efforts to conceal his losses finally came apart.

In the wake of these scandals and others like them, regulations have been imposed, and auditing safeguards have been established around the world.

But industry observers say yesterday's report of $750 million in losses because of unauthorized currency trading at Allfirst Financial Inc. in Baltimore shows that banks and their stockholders are still vulnerable to the common elements in many of the recent rogue trading scandals - poor management and the deceit and human frailties of the people they employ.

Like Daiwa and Sumitomo, Allfirst is big enough to absorb its losses. But like other rogue trading scandals, the Allfirst disaster likely was made possible by lax supervision of traders, and their ability, at least for a while, to cover up their mounting losses.

"It does indicate they [Allfirst] have inadequate safeguards and serious management problems, and stockholders are entitled to an explanation," said Peter Morici, professor of international business at the University of Maryland.

Paul Nadler, a finance professor at Rutgers University and a banking consultant, said financial institutions like Barings and Allied Irish open themselves up for trouble when they expand into operations they know little about.

When Allied Irish bought Allfirst, Nadler said, "I was thinking, 'What the hell is Ireland doing buying this bank in the first place?' ... Do you know the people you're getting? ... What's your motive?"

At Barings, Morici said, "The old-line executives didn't understand the business they were in, and didn't recognize that they didn't have the appropriate safeguards."

The Allfirst losses rank as the sixth-largest blamed on unauthorized trading in the past 15 years. The list includes Sumitomo Corp. in Japan ($2.6 billion in 1996); Orange County, Calif., ($1.7 billion in 1994); Metallgeselschaft AG, in Germany ($1.5 billion in 1993); Barings ($1.4 billion in 1995); and Daiwa Bank ($1.1 billion in 1995).

In the Barings case, Leeson built up $1.4 billion in losses betting the wrong way on movement of the Tokyo stock market. The house of cards he created eventually collapsed, taking Barings with it.

Leeson pleaded guilty in Singapore to fraud and forgery charges, and served 4 years of a 6 1/2 -year jail sentence. In a BBC documentary, he said he altered documents to conceal his losses and managed to convince his supervisors that he was making a killing for the bank.

"Every night I would ask for millions of pounds, and give them ridiculous stories - and they would believe me," he said.

Peter Norris, Barings' former chief executive, told the BBC that senior managers noticed discrepancies in Leeson's accounts two years before the collapse but failed to act. "It was like the Mad Hatter's Tea Party; it is totally bizarre, how a group of rational, intelligent, competent people were totally at variance with reality," Norris said.

An inquiry by the British Finance Ministry concluded that Barings' leaders had a poor understanding of the futures trading Leeson was engaged in and had insufficient internal controls to detect and stop his losses.

"Banks - not just in the States, but those in Europe and around the world - put in substantial safeguards after Barings," said Kenneth H. Thomas, a finance lecturer at the University of Pennsylvania. "And besides all the domestic and international regulations, banks have their own internal auditing procedures."

"What we learn from all of this," he said, "is that no matter what we're able to do as far as regulation, as long as the human element is involved there is the potential for things to go awry."

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