Application The Luck of the Irish Eludes Allied Irish Banks 
In February 2002, Allied Irish Banks announced that a rogue trader at its U.S. unit lost $750 million through unauthorized foreign exchange trades. Allied said John Rusnak, a foreign exchange dealer at its U.S. unit Allfirst tried to disguise huge losses through fictitious foreign exchange trades over the past year. Traders in the foreign exchange market believe that Rusnak bet on the wrong direction of the Japanese yen, which was the only currency that moved enough during that period to have enabled a trader to pile up such colossal losses. The foreign exchange trades at issue were believed by the bank to have been hedged with currency options to reduce their risk. As it turned out, however, the options that Rusnak claimed to have bought were fictitious, leaving the bank with enormous “naked” (unhedged) foreign exchange positions. As his losses piled up, he placed even larger foreign currency bets, which turned sour as well. Bank analysts said the episode raised serious issues about the risk management controls in place at Allied and throughout the entire banking industry that are supposed to prevent the kinds of events that apparently hit Allied.
7 According to Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, some bank managers have little knowledge of controls on their trading activities. For example, when he visited a major financial institution in New York, the CEO assured him that the bank had a highly sophisticated risk-management system already in place, the CFO said they had just implemented it, the head of trading said they were about to implement it, and the traders had never heard of it. See Anthony M. Santomero, “Processes and Progress in Risk Management,” Business Review, Federal Reserve Bank of Philadelphia, Q1 2003, p. 3.