- The Washington Times - Tuesday, February 12, 2002

It is common for currency traders and those with similar professions to receive compensation for profits made on deals, bank observers say, but recent revelations involving an employee at Allfirst Financial Corp. underscore potential problems with such policies.
John Rusnak, a former currency trader at the Baltimore headquarters of Allfirst is accused of losing $750 million in fraudulent currency trades. The seven-year veteran of the company was hired to make money by placing bets that one currency, such as the dollar, would rise in value compared to another currency, like the Japanese yen. He earned a salary of $85,000 a year, but reportedly received an average of $200,000 a year in compensation based on the results of his trades.
Bank observers say compensation systems that tie income to performance can place pressure on workers to do irrational and perhaps even illegal things in an attempt to record profits. Furthermore, banks often struggle to determine if compensation should be based simply on volume of trades or on their long-term shareholder value.
"Sometimes, performance-based salaries can be a problem," said Kenneth Thomas, a lecturer at the University of Pennsylvania's Wharton School of Business.
It is not clear whether compensation motivated Mr. Rusnak's behavior. He is accused by Allfirst and its parent company, Allied Irish Bank, of losing money on bad currency trades, then attempting to cover up his losses by entering phony transactions into the company's records.
When asked about their compensation policies yesterday, most major banks were tight-lipped, often citing a desire to distance themselves from the Allfirst controversy. But independent observers say banks have struggled with outlining the specifics of a performance-based compensation plan.
The $750 million loss underscores the belief of many observers that currency trading and other similar activities are too risky for commercial banks to be involved in. Many believe regulators should be "re-evaluating the extent to which banks have been allowed to go out and march into inherently risky areas," Mr. Thomas said.
Meanwhile, Allied Irish said Eugene A. Ludwig a former currency comptroller during the Clinton administration would publish a report detailing the company's losses within 30 days. Mr. Ludwig, who has been hired by Allied as a consultant, currently serves as managing partner of Promontory Financial Group in Washington.

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