Chief executive Michael Buckley has accepted that Ludwig's investigation showed "incompetence and lack of supervision at a gross level" and he insists AIB management has taken responsibility for the debacle at its Allfirst subsidiary, writes Siobhán Creaton.
On February 6th, 2002 the world woke up to hear another rogue trader had run amok.
It was the day Ireland's biggest bank, AIB, was forced to disclose that a foreign currency trader at its US subsidiary Allfirst, John Rusnak, had gambled away $750 million (€770 million) of its money.
The loss was later reduced to $691.2 million with the bank saying his disastrous trading activities and subsequent fraud had gone undetected for five years.
It was a devastating blow for AIB. Its pale-faced executives quickly described it as a "devious and complex" fraud and attempted to reassure shareholders and staff that Mr Rusnak would not break AIB.
Six years previously Nick Leeson had destroyed Barings bank after racking up losses of $1.4 billion.
Rusnak had embroiled AIB in the world's fourth biggest banking fraud. Chief executive Michael Buckley tried to reassure the public that AIB remained financially strong.
Half an hour before the stock markets in Dublin and London opened he stressed that AIB would still make a profit after tax of €400 million.
It was a nervous time in the markets and investors quickly began to sell AIB shares on foot of the news despite his soothing words.
By the close of business that day some €2 billion had been wiped off AIB's stock market value. AIB shares had opened at €13.62 that morning and tumbled to €11.35 by 5 p.m. The bank looked vulnerable, its credibility had been shattered and market sources were soon calling for heads to roll at the highest level.
Mr Buckley suggested Rusnak had gone on the run but he later turned up with his lawyer, David Irwin, and began to meet the US Federal Bureau of Investigation (FBI).
He was fired with Mr Buckley also ordering the suspension of six of his colleagues at the small treasury operation in Baltimore.
The most senior of them was Cork man David Cronin who was the head of treasury. Rusnak's immediate superior, Mr Bob Ray, back office clerk Mr Larry Smith, head of internal audit Mr Michael Husich and his colleague, Mr Lou Slifker and Mr Jan Palmer, the senior vice-president of Allfirst's treasury division were also suspended pending an investigation of the fraud.
AIB chairman Lochlann Quinn convened an emergency meeting of the board of directors which decided to appoint an eminent person to head an inquiry at Allfirst.
The former US comptroller of the US currency, Eugene Ludwig, who had previously undertaken a similar exercise for National Australia Bank, was selected and given 30 days to deliver a report to Mr Quinn.
In the interim AIB's share price began to recover, largely on the back of rumours that Royal Bank of Scotland was hovering and preparing to launch a takeover bid. Mr Buckley and his senior management team met investors and there was lengthy debate on how much confidence investors could now have in the individuals running Ireland's biggest bank. Those being openly criticised were Mr Buckley, Allfirst chief executive Susan Keating and the chairman of AIB's US operations, Mr Frank Bramble.
Ludwig's report, for which AIB paid the guts of $10 million, highlighted a series of disasters, weak controls and lax management as part of the reason why Rusnak had not been caught sooner. The report did not apportion blame for what happened and left it up to AIB's board of directors to decide who should lose their jobs.
Mr Buckley's position was by no means assured particularly after Mr Ludwig confirmed he had received a tip-off the previous year about massive foreign currency trading at Allfirst. He had rung Mr Cronin after the tip-off to inquire if there was anything to the rumour suggesting one of Allfirst's employees had become one of the biggest foreign currency traders in North America.
Mr Cronin allayed his concerns explaining that Allfirst had new arrangements with Citibank and Bank of America, to act on their behalf in the currency markets, and that this made its trading volumes appear much higher than they were.
After his conversation with Mr Buckley, Mr Cronin sent him an email, giving trading volumes substantially lower than they actually were. He had consulted Rusnak before writing this email and the FBI found a copy of the correspondence on Rusnak's computer. Mr Buckley has said Mr Cronin's explanation was so convincing the matter simply "left his mind".
Ludwig revealed that Mr Cronin's superiors, Ms Keating and Mr Bramble, had harboured concerns about the treasurer and had tried to have his reporting arrangements changed to ensure closer supervision.
They never followed through on this largely because Mr Cronin had been perceived as the "home office spy" whom AIB would protect at all costs.
The bank was under enormous pressure to allocate responsibility for the scandal with AIB sources indicating to the media that the axe would fall in Baltimore, pointing at Keating.
Her position seemed untenable yet she survived AIB board attempts to dismiss her on foot of Ludwig's findings.
Mr Buckley and Mr Quinn offered their resignations to the board which were rejected. Mr Buckley insisted this was not "grand standing" but a reflection of accountability. In fact, as revealed in the book Panic at the Bank; How John Rusnak Lost AIB $691 million, it was a last-ditch effort by the bank's senior executives to embarrass Ms Keating into doing the same to appease the markets.
But the Allfirst board, which had long resisted interference from its Irish parent, stood by her and threatened to resign en-masse if she was forced to go.
In the end Mr Bramble, who the bank said had already decided to retire some months earlier, was allowed to retire with a $2.9 million handshake.
Long-standing directors of the Allfirst board, former chairman Jerry Casey and former AIB chief executive Tom Mulcahy, also agreed to retire while AIB sent Eugene Sheehy, the executive who had been running its retail banking operations in the Republic to head Baltimore.
Bonuses due to Mr Buckley and AIB executives in Ireland were cancelled, the only censure they suffered.
In July, Ms Keating, known in Allfirst as "the Velvet Hammer" for her style in getting rid of people from the bank, was forced to leave.
She too got a large payment believed to have been around $2 million.
Rusnak did not break AIB but his activities destroyed Allfirst. The bank had already been struggling and had been a drain on AIB. The bank's large investors had lost patience and were now telling Mr Buckley to get rid of it.
Last month he said AIB had agreed to sell the Maryland bank to M&T, a financial institution based in Buffalo, New York. Under the terms of the deal, due to take effect in March 2003, AIB will in turn take a 22.5 per cent stake in M&T.
The deal was well received with the markets viewing it as a good outcome considering the scale of the disaster. For AIB shareholders it meant they still had an exposure to the US economy through M&T, a bank with an impressive track record.
Eight months after the scandal AIB's share price has recovered and it is business as usual. The bank will feel vindicated that it was indeed a victim of a determined and complex fraud now that Rusnak has pleaded guilty to the charges.
Its lawyers will examine the case closely amid indications that the FBI is still investigating the fraud to determine whether other individuals working in some of the world's large financial institutions may have been complicit in it.
AIB faces several legal actions taken by disgruntled US investors seeking damages for the fraud. The bank's auditors, PricewaterhouseCoopers, might also be sued for failure to catch the fraud during the audit.
Mr Buckley has accepted that Ludwig's investigation showed "incompetence and lack of supervision at a gross level".
He has expressed reluctance to pursue the auditors insisting that AIB management had taken responsibility for the many failings and oversights at Allfirst. At the time he asked: "How many more lashes do you want us to give ourselves?"
