NAB counts cost of scandal as trader's claims pile on pressure

By GREG ANSLEY


CANBERRA - On Monday night the world began shaking for National Australia Bank, already trying to live down a series of costly failures.

A foreign exchange trader, suspicious about the activities of a group of colleagues, reported his misgivings to his superior. Like wildfire, they raced up the chain of command to chief executive Frank Cicutto.

Bank officers worked through the night to track down what one official described as the convoluted trail left by four traders in their wild dealings in Australian and New Zealand dollars since October.

What they found appalled them: losses of up to A$180 million ($206 million). On Tuesday, Cicutto convened a special board meeting to discuss a crisis that internal controls were supposed to have ensured could never happen.

A terse, and to most analysts unsatisfactory, statement was released after the meeting, reporting the board's action to close out the losses and to minimise any further losses from occurring.

"The losses involved are not expected to exceed A$180 million (pre-tax) and have occurred after the end of the completion of the National's accounts for the year ended September 30, 2003," the statement said.

"No customers of the National have been affected by the trading activities which generated the losses."

But the somewhat battered reputation of the NAB certainly has, and analysts have speculated on the wider system of checks and balances that has been progressively introduced to prevent the ravages of rogue traders.

The Australian Prudential Regulatory Authority (Apra), in addition to its investigation into the NAB's woes, will also review trading practices at the other major banks.

Australia, like most other countries, has scrambled to close the doors in the years since Nick Leeson broke London's ancient and venerable Barings Bank after losing US$1.3 billion through reckless trading out of Singapore.

There have been others: John Rusnak cost Allied Irish Bank US$691 gambling foolishly on the Japanese yen, and Yasuo Hamanaka's manipulations of the copper market through unauthorised trading cost Japan's Sumitomo Corporation US$2.5 billion.

NAB's losses are hardly in this league. With assets of about A$400 billion, a net profit last year of A$3.95 billion and expectations of a solid year ahead, the bank is hardly at risk. And while an initial panic wiped about A$700 million off its share value, by the end of the week most of this had been recouped.

But analysts have said that the forex disaster will be sufficient to wipe out this year's expected 3 per cent growth in cash income and - more importantly - raise new clouds over the management of the bank.

While directors have rallied around Cicutto, newspaper commentators and market analysts have been speculating that the chief executive's time may be nearing its end.

Australian Shareholders Association director Cliff Caldwell told the Sydney Morning Herald: "He ought to [stand down] but I don't think he will."

Italian-born Cicutto took over from Don Argus in 1999 after a long career with the National, broken by a brief spell as chief executive of Scotland's Clydesdale Bank in the mid-1990s.

He has overseen NAB's global retreat and renewed focus on Australia, including the A$4.6 billion acquisition of superannuation and insurance group MLC three years ago.

But the bank has also suffered some seriously embarrassing setbacks, most recently the failed A$7 billion bid for AMP, writedowns of up to A$4 billion in its American HomeSide lending operations, a A$104 million loss in the King Bros bus group, compensation payouts of A$67 million for losses on trust units, and litigation by South Koreans demanding A$66 million in compensation for frauds involving forex trader Choi Chui-joo and forged NAB deposit certificates and promissory notes.

The currency scandal is hardly what the NAB needs now.

The disaster had its beginnings in October when three Melbourne traders - head of foreign exchange options Luke Duffy, 34, chief foreign exchange options dealer David Bullen, 31, and Vince Vicarra - teamed up with London trader Gianni Gray to gamble on the Aussie and the Kiwi.

According to The Age, Duffy this month received a A$250,000 bonus, and Bullen A$200,000 - paid before the scandal broke - for their trading in the September 30 year.

Ignoring the forecasts of their own bank, they in effect bet that the surge of the currencies against the greenback would plateau and even ease back, allowing them to take a tidy profit.

Instead, the two currencies continued to climb, the Aussie by 14USc and the Kiwi by 10USc, sparking a panic to recoup losses and instead setting in train a compounding deficit, much as Leeson had done in Singapore.

The four were suspended when the scale of their operation, involving perhaps thousands of trades, was revealed in Monday's all-night audit.

The Australian caught up with Bullen after he had celebrated his son's seventh birthday with his wife and 2-year-old daughter in Melbourne's Botanic Gardens.

In a cryptic and somewhat sad interview, in which Bullen claimed to have not one friend in the world, the newspaper was told: "I don't expect too much from life, and if you don't expect too much you are not disappointed."

What Australia expects is a sound explanation of how the four traders were able to run up such losses in three months, working in a system designed to prevent that happening.

Somehow, analysts have speculated, they managed to hide or fudge the true extent of their deals by failing to accurately report them and by creating fake hedging trades to cover their positions, aided by the fact that their trades were made in the period between scheduled audits.

What is far from clear is how they managed to do this without discovery by their overseers in the back office that records and confirms the trades, or without alerting their colleagues at the banks with which they did business, which also had to confirm the deals.

The NAB has pointed to the complexity of the trades and the fact that this was an isolated incident, subsequently dealt with in an open and transparent manner. It has also said that the discovery of the trades and the rapid action taken to close them off could be seen as vindication of its system.

But Bullen denies falsifying reports and told the Australian Financial Review that currency options dealers had to consistently breach "value at risk limits" by several million, and "vega" volatility limits, a key determinant of options trading profits.

"We were already over the limits for a number of months and the bank knew about it," he said.

"It has been going on and off for a year and consistently every day since October. It was signed off every day by the risk-management people."

The Federal Government is also concerned. "It is important that external sources are involved [in the investigations]," said Treasurer Peter Costello. "The prudential regulator is already involved and is speaking to NAB to ascertain whether the systems are adequate. "Once the investigation is finished, if there are any breaches of the law, then NAB must refer that to the relevant authorities to bring prosecution."

NAB has already begun its own investigation, calling in the forensic accounting unit of PricewaterhouseCoopers. The results are expected to be known next month.

The losses are also being investigated by the federal police and corporate watchdog the Australian Securities and Investment Commission.