Outlook: Another fine example of Murphy's Law in action

Allied Irish Banks; Alan Sugar; Corporate league table
Click to follow
The Independent Online

The ghost of Barings past returned to haunt the banking industry yesterday. A rogue trader in a faraway place loses his employer $750m by gambling on the foreign exchange markets and then disappears off the face of the earth. Sound familiar?

This time, the victim is not Britain's oldest bank but Ireland's newest and now biggest bank. Nick Leeson's exploits in Singapore did for Barings, of course, and today it is no more than a brass plate in the City with a Dutch owner. Allied Irish Banks, on the other hand, says it will survive. The fraud perpetrated on AIB by John Rusnak, a churchgoing family man in its Baltimore subsidiary Allfirst, is a heavy blow but not a fatal one. Although $750m is a big sum in anyone's language, AIB is taking it on the chin without any serious harm being done to its capital adequacy or its dividend.

The damage to its reputation, on the other hand, is another matter. More heads will surely roll than just those of a handful of executive vice-presidents and back office staff on the other side of the Atlantic.

Like Leeson's activities, the scandal which has engulfed AIB is remarkable for three things: the size of the bets being taken, the length of time that the fraud went unnoticed and the lamentable failure of the bank's internal controls to detect what was going wrong until it had racked up huge losses.

Until the FBI catches up with Mr Rusnak, it will be hard to establish whether the fraud was the result of gross incompetence or criminal greed. The degree of internal and external collusion involved would, however, point to a determined and methodical attempt to hoodwink the bank.

But irrespective of motivation, the most disturbing aspect of the affair is how a high street bank which conducts 97 per cent of its business with retail and commercial customers could be in a position to lose such large sums of money on exotic forex transactions in the first place.

The answer lies buried in AIB's history. Soon after its creation in 1966 through the trinity of Provincial bank, the Royal Bank and Leinster and Munster Bank, AIB overtook Bank of Ireland as the country's biggest lender. But Ireland is a small market tied closely to the UK economy and when the North American and European banks began to invade its home territory and the Irish government began to close down tax loopholes, AIB naturally enough looked abroad for expansion.

That quest took it as far afield as Asia and Poland and, of course, the US, a country which has proved a torrid place for more British companies than you can count, including a few banks. Think of Midland and Crocker. Think of Abbey National, the UK mortgage bank which discovered it had a £95m exposure to Enron of all companies. Think of how PacifiCorp has nearly put the lights out at ScottishPower.

As a rule, the further away a subsidiary, the more difficult it becomes to manage and the greater the scope for disaster. Allfirst appears to have demonstrated this in spades. When proprietary foreign exchange trading accounts for less than 3 per cent of profits, the temptation was probably to give it a similarly small amount of supervisory attention. The result is that the fraud went on for more than a year, unnoticed by Mr Rusnak's superiors, the bank's internal audits, the external auditors PricewaterhouseCoopers and, of course, headquarters back in Dublin.

The checks and balances put in place post-Barings were supposed to prevent this sort of thing happening. Although AIB is neither UK-registered, nor regulated by the Financial Services Authority, it has a London listing and likes to think of itself as one of the crowd, bracketed with the likes of HBOS, Barclays and the rest.

Indeed, what quickly became apparent yesterday is that while the Irish regulators and AIB may have been unaware of the problems unfolding in Baltimore, plenty of traders in the City were aware of Mr Rusnak's loss-making positions because they were at the profitable end of some of them.

AIB has now shut the proverbial stable door by suspending forex trading in Baltimore and the markets seem to have accepted that Allfirst is an isolated case. Bank stocks shrugged off the early morning shock from Dublin. But their compliance departments cannot afford to be so sanguine. If nothing else, AIB it is another reminder of Murphy's law – if something can go wrong, it will.

Sugar misdials

Sir Alan Sugar is still looking for another blockbuster product, 20 years after he made his name and his fortune by introducing the masses to the world's first affordable home computer. Em@iler Plus, which went on show yesterday, six months later than planned, is not it.

Amstrad's glory days are long gone and it is hard to see how his glorified telephone will bring them back. The first version of Em@ailer sold 110,000 units and, claims Sir Alan, washed its face taking into account the revenues earned every time the machine is used.

But unlike his original invention, the Em@ailer was behind its time and so is its successor, even though Sir Alan has sought to increase its appeal by grafting on a web browser.

Sir Alan says that while email will remain the "killer application", the Em@ailer could just start a new craze among kids like the Hoola Hoop, skateboards and Playstations once did. Who are you kidding, daddy? The screen is monochrome and the equipment is non-portable. Two turn-offs for the youth market before the Em@ailer even hits the shelves, which, alas, will not now include the Christmas period.

If anything, the Em@ailer is aimed at an ill-defined technophobe market which Amstrad reckons could bring in 250,000 sales in the first year. But in an age when nearly half the country's homes are online and 60 per cent have a PC, does such a market still exist and why would anyone want to fork out £100 for an Em@ailer when they can just as easily download computer games using their mobile? To cap it all, existing Em@ailers cannot upgrade to the new model because they will not be able to take their existing email address with them. Nice try, Sir Alan, better luck next time.

Hope for M&S

The League tables for the best and worst corporate image of the past year provide a harsh lesson for some of Britain's biggest companies. Railtrack and Marconi are predictably there propping up the rest following the annus horribilis that 2001 turned out to be. But nor can the big banks seem do anything right as far their press perception is concerned. In a list of 2,921 companies Barclays, NatWest and Lloyds TSB all ranked in the bottom 20.

But all hope is not lost. Companies can restore their reputations. BMW finished in the bottom 20 in 2000 after pulling the plug on Rover. Last year it raced back to finish in the top 10 with Jeremy Clarkson saying the new sporty M3 was "so good I'd marry it". What odds then on Marks & Spencer (fifth bottom in 2001) enjoying a similar renaissance?