John Rusnak and the $691 Million Allfirst Currency Fraud

John Rusnak was a foreign exchange trader at Allfirst, the US subsidiary of Allied Irish Banks (AIB), who hid about $691 million of currency trading losses by recording fake options trades. The losses came mainly from bets that the Japanese yen would strengthen against the dollar. Those losses stayed hidden for about five years until it was discovered in February 2002.

Rusnak pleaded guilty to bank fraud and was sentenced in January 2003 to seven and a half years in prison. It remains the best-known rogue trading case in the currency market.

Who John Rusnak was

Rusnak was a mid-level trader in Allfirst's treasury department in Baltimore, Maryland. His job was supposedly a modest form of currency trading, taking views on exchange rates while using options to limit the bank's risk. On paper his book made small, steady profits, which is exactly what his managers expected to see.

How the losses began

Rusnak believed the yen would strengthen against the dollar, and he took large forward positions to profit from that view. Through the late 1990s the yen often moved the other way, and his positions lost money. Rather than close them and report the losses, he kept them open and added to them, hoping the market would turn. Each new loss needed hiding, and the hole grew.

The fake options

The cover-up relied on pairs of invented options. Rusnak would record that he had sold an option that expired the same day, earning a premium, and bought a longer-dated option with the same currency and strike price, paying a similar premium. On paper the two seemed to offset each other, leaving the bank with no net cash exposure. In reality the long-dated option did not exist, and its recorded value covered his real losses.

The same-day options expired before anyone had reason to look at them, and the bank's systems did not flag expiring one-day options. Asian banks were supposedly on the other side of the long-dated options, but nobody at Allfirst confirmed them with those banks. Rusnak also persuaded colleagues in the back office, whose job was to check trades, that some confirmations were not needed.

Why the controls failed

AIB hired Eugene Ludwig, a former US banking regulator, to investigate. His report, published in April 2002, found that Rusnak had "manipulated the weak control environment" in Allfirst's treasury. Among the failures it described:

• Trades were not independently confirmed with the other banks that were supposedly on the other side.
• Rusnak supplied some of the prices used to value his own positions, so he could make them look better than they were.
• Risk limits were not enforced, and warning signs such as the size of his positions and the cash he used were not followed up.
• The trading desk was small and remote from the parent bank, so few senior people understood what it did.

Discovery and aftermath

In early 2002 a back-office employee found trade tickets that could not be matched, and the pieces started to come apart. When the scale became clear, AIB announced losses of about $691 million. Senior Allfirst executives were removed, and AIB later sold Allfirst to M&T Bank.

Rusnak was indicted on bank fraud charges in June 2002. He was not accused of stealing money for himself: prosecutors said he did not profit from the trading losses themselves. After pleading guilty in October 2002, he was sentenced in January 2003 to 90 months in prison and ordered to pay restitution.

Why rogue traders keep going

Rogue trading cases look remarkably alike from the inside. A trader takes a loss that feels unfair or temporary. Admitting it would hurt their bonus, their reputation or their job, so they keep the position open and hide the gap, expecting the market to come back. When it does not, the position has to grow to have any chance of recovering the loss, and the cover-up must grow with it.

Psychologists call part of this loss aversion: people feel losses more strongly than equal gains and will take big risks to avoid locking one in. Add the pressure of a trading floor, a culture that rewards apparent profits and controls that rely on trust, and the mix becomes dangerous. Nick Leeson at Barings, Jérôme Kerviel at Société Générale and Kweku Adoboli at UBS all described versions of the same spiral, although their cases differ in the details.

What stops the spiral is structure: someone independent checking every position, limits that are enforced, and a culture where reporting a loss early is treated as good practice rather than failure. Individual traders can copy the idea with fixed stops, a trading journal and a rule never to add to a loser.

Lessons for traders and firms

• Admit losses early. A small loss accepted is cheaper than a big one hidden.
• Never add to a losing position to get back to even. That is how a bad trade becomes a disaster.
• Check what you are told. Firms need independent confirmation and pricing; individual traders need honest records of every trade.
• Steady profits with high risk are a warning sign, not a reassurance.

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