Cheating, stealing, deception, millions in losses, falsified documents, hidden agendas - at first blush it sound like the latest thriller rather than something you'd read about in Wall Street & Technology. Then again, Wall Street does have a penchant for scandals. This year, many are being revealed, keeping risk managers and compliance officers extremely busy.
After a few quiet years, risk managers are now overloaded with issues and initiatives to manage. The Sept. 11 tragedy created an imminent need for improved disaster-recovery and business-continuity planning - a major risk-management initiative. The event also highlighted the need for a more watchful eye on customers, and their actions, to avoid money laundering and terrorism funding - also the responsibility of the risk department. Next, the Enron debacle put risk managers in the hot seat. Many financial institutions were overexposed to Enron and had not securitized their loans, forcing risk managers to take a closer look at collateralization.
Simultaneously, the scandals began to emerge. The two high-profile cases of John Rusnak, a currency trader at Allfirst Financial, a Baltimore subsidiary of Allied Irish Banks PLC, and Frank Gruttadauria, branch manager of Lehman Brother's Cleveland office, highlight the ever important need for improved oversight. How these two men got away with their scams, for as long as they did, seems baffling. However, when you take a closer look, it is not so shocking.
There are two simple elements that make it easy to fathom. Gruttadauria ran the Cleveland office, structuring it so that the branch compliance officer reported to him - clearly a flawed way to set up workable controls. In the case of Rusnak, the questions is, how was he able to trade so far above his limits for five years? One back-office employee reportedly said that Allfirst's risk controls were not very sophisticated and that he was instructed not to bother confirming trades with banks in Asia - with whom Rusnak did a large portion of his business. In addition, the risk managers and operations staff were reliant on Rusnak for currency rates - a system which made it impossible for independent verification.
With all of these issues and scandals, what is a risk manager to do? For starters, read our cover story, p.10, to better understand what went wrong at Allfirst and Lehman Brothers and prevent your firm from making headlines. Also, visit our risk-management resource center (www.wallstreetandtech.com/rc/rm) to read other valuable stories that will help you manage the multitude of risk initiatives on the horizon.