Yet Another Scandal
The Allied Irish Bank Case
Written by Hans Raj Nahata and Felix Stauber under supervision of Professor Michael Pinedo, Stern School of Business, New York University. For classroom use only.
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:
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. At this point, the reader is urged to peruse the appendices on “An Overview of Foreign Exchange Markets”, and “A Primer On Operations Risk”. Our understanding of “People Failures” and “Process Failures” follows next. To gain an insight into this scandal we have also compared it with the infamous Barings case. We must warn the reader that our recommendations are deceptively simple. We have restrained ourselves from concocting specialized details. To give general broad, yet actionable, guidelines has been our purpose. These recommendations are split into two sections. In “Model of a Direct Trading Operation” we present a safe-way of trading. Finally, we dwell on some general recommendations. We wish and hope our readers a fruitful reading.
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.
Brief History Of The Scandal...
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