LSBM302 AB1 AIB Case 2002 Excerpt NYU | Aib Internet Banking

LSBM302 AB1 AIB Case 2002 Excerpt NYU,
This is a short story of failures. It is rather a chilling story of how a single person, under the most common work circumstances, can lose $750 millions! And he does so, by bullying his subordinates, intimidating his colleagues, threatening his supervisors, bribing his counter-parties, forging documents, falsifying the data, and betting more and more after having lost the most. A perfect example of "escalation of commitment". A fantastic case of complacence over compliance. This is only the first reaction: Sensationalism ends here. The core of the case is a clear reflection of:

About the Book

LSBM302 AB1 AIB Case 2002 Excerpt NYU |Aib Internet Banking
Introduction LSBM302 AB1 AIB Case 2002 Excerpt NYU

LSBM302 AB1 AIB Case 2002 Excerpt NYU | Aib Internet BankingLSBM302 AB1 AIB Case 2002 Excerpt NYU is a short story of failures. It is rather a chilling story of how a single person, under the most common work circumstances, can lose $750 millions! And he does so, by bullying his subordinates, intimidating his colleagues, threatening his supervisors, bribing his counter-parties, forging documents, falsifying the data, and betting more and more after having lost the most. A perfect example of “escalation of commitment”. A fantastic case of complacence over compliance. This is only the first reaction: Sensationalism ends here. The core of the case is a clear reflection of:

  • Misalignment between the business strategy and operations strategy.
  • Broken procedures, inadequate policies, conflict of interest, sub-optimal decisions making, etc.

Historians tend to report each other. Luckily, we are not historians, and thus not obliged to report just the facts in the chronological order. Nor are we inclined to project Mr Rusnack as a two-horned clever imp. Instead, processes, procedures and policies are the foci of our investigation. Since hindsight is always 20/20 we will take the liberty of discussing “if onlys”.

We invite the reader to first get acquainted with the bank, and then with the scandal. We need to do this because both the site and the events of crime are important to analyze the mis-doings of the individuals and (more importantly) weakness of the system. Our understanding of “People Failures” and “Process Failures” follows next. At this point, the reader is urged to peruse the appendix on “A Primer On Operations Risk”.

An Overview Of The Bank

Allied Irish Bank (AIB) is a multi-national bank with both European and North American presence. Refer to exhibit “Divisional Structure Of The Bank”

To fulfill the strategic objective of increasing its geographic diversification of investments and operations, between 1983 and 1999, AIB took following actions related to acquisition of First Maryland Bancorp.

  • AIB acquired substantial stake in the First Maryland Bancorp (1983).
  • AIB acquired just fewer than 50% of First Maryland’s common stock (1986).
  • AIB carried out a cash-out merger of First Maryland into wholly-owned subsidiary (1989).
  • First Maryland was renamed Allfirst (1998).

AIB believed that it had a strong and sophisticated treasury operations; and therefore it appointed David Cronin, a senior executive of AIB, as the treasurer in the senior management team of the Allfirst. With Cronin’s appointment, AIB also hoped to have a good vantage point from which it could monitor its investments in America. Conversely, yet not too surprisingly, Cronin was viewed as a home-office spy by the Allfirst management! Rest of the senior management of Allfirst, including the CEO and CFO, was vernacular.

The treasury department was lead by Cronin. Exhibit “Allfirst’s Treasury Department” details the high-level structure and roles of his department. Note that Cronin, the same senior executive charged with ensuring profitable trading was also responsible for effective control on that trading! A clear case of conflict of interest – a setup bound to fail.

LSBM302 AB1 AIB Case 2002 Excerpt NYU | Aib Internet Banking

Brief History Of The Scandal

In 1989, AIB carried out a cash-out merger of First Maryland Corp., a retail bank in the mid-Atlantic region, into a wholly owned subsidiary, which was renamed Allfirst in 1999. The acquisition furthered AIB’s strategy to increase the geographic diversification of its investments and operations.

Part of the organization was a proprietary foreign exchange trading operation that was overseen by the bank’s treasury funds management. In 1993, Mr. Rusnak was hired into the role of foreign exchange trader in products such as options and futures, which was his purported specialty. He initially reported to a trading manager who also supervised the proprietary interest rate traders and reported to the treasury funds manager. However, the reporting line changed in fall of 1999 when the trading manager left the bank. The treasury funds manager, Mr. Ray made the decision not to replaced him, in part because of budgetary constraints. From this point forward, Mr. Rusnak reported directly to Mr. Ray, who was reportedly lacking detailed knowledge of the foreign exchange markets.

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