Acknowledging that the bank's safeguards "failed miserably," Allfirst Financial Inc. Chairman Frank P. Bramble said a well-known outsider will be named by early next week to restore confidence and help determine how a currency trader was allegedly able to cover apparent losses of $750 million with phony transactions and how to avoid a recurrence.
"It's a well-known U.S. financial-services industry figure - he's nationally known," Bramble said yesterday of the outside executive, although he declined to name him.
John M. Rusnak, 37, of Mount Washington is accused of creating phony transactions to cover hundreds of millions of dollars in losses during currency trades he made last year. No charges have been filed against him.
Meanwhile yesterday, two investigators from the Central Bank of Ireland - which regulates Allfirst's Dublin-based parent, Allied Irish Banks PLC - joined federal and state regulators at Allfirst's South Charles Street headquarters, where a coordinated review of how the bank's safeguards broke down is under way.
An independent institutional research service said that Allfirst's high level of foreign-currency exposure could have served as a "red flag" that the local bank was taking on too much risk.
The four Allfirst managers suspended as a result of the alleged fraud are cooperating with the investigation, Bramble said.
He said the bank has fared well with both depositors and commercial customers, who seem willing to accept the bank's word that it remains financially sound.
Federal law enforcement authorities continued their investigation of Rusnak, who has been at home. Rusnak's attorney maintains his client committed no crime and disputes the loss figure posed by Allfirst.
Yesterday, Bramble said the outside executive will help restore credibility to the Allfirst and AIB nameplates.
"We will be bringing into the internal investigation an external resource - a widely known U.S. public figure," Bramble said.
The outside executive will head the investigation and develop a report for the AIB board of directors. The report will look at what went wrong as well as what needs to be fixed and how those improvements might best be made. The changes could touch "processes, procedures and even organizational structure," Bramble said.
By late yesterday, Allfirst's headquarters may have seemed like a convention for bank regulators. Federal Reserve regulators and their Maryland counterparts have been there for much of the week and were joined yesterday by the duo from Ireland. Internal auditors from Allfirst and AIB are also conducting the internal company investigation. Even so, Bramble said, there's coordination among the parties.
"The Federal Reserve has been very supportive and the state very helpful helping us get through this investigation," Bramble said.
Mary Louise Preis, Maryland's commissioner of financial regulation, said regulators will be at Allfirst at least through the early part of next week.
"We are focusing all our energy and attention on this and have been since we first found out," she said. "The regulators will continue to be there next week."
A key question continues to be how allegedly errant trades could have gone undetected for such a long stretch.
"When people do fraudulent things, they do it in a way that's hard to detect," Bramble said. "This trader found a way to crack into the operating system and control system of the company [which] should have been able to pick up on this but didn't. Somehow our internal control processes - either in our people or our procedures - failed to identify the nature and degree of the fraud."
Gimme Credit, an independent research service for institutional investors, said the high level of foreign currency activity at such a moderate-size bank was a sign that trouble was looming. According to a report Thursday by Gimme Credit analyst Kathy Shanley, as of the end of last year's third quarter, Allfirst's foreign currency contracts totaled $4.9 billion, equal to 28 percent of total assets. In contrast, such contracts amounted to only 11 percent of total assets for Allfirst's peers, Shanley said.
"Perhaps this should have been a red flag, but it is difficult to fully evaluate internal controls from outside the organization," Shanley wrote.
The bank has worked hard to communicate with depositors and commercial customers and has suffered few real problems, however, Bramble said.
Even so, this has been a very painful week for Bramble, a 35-year veteran of the banking industry. "I was staggered by it."