Deception was a key factor in hiding the debt from senior executives, writes Conor O'Clery, International Business Editor

As John Rusnak's gross trading figures at Allfirst mounted almost daily last year until they reached the staggering sum of $225 billion (€256.6 billion), they were regularly reported to senior Allfirst executives as a fraction of their true value, sometimes as little as a tenth, according to a source close to the FBI investigation of the trader's activities.

The deception was a key factor in trying to ensure that senior executives of Allfirst and AIB would not become aware of the full extent of the foreign currency dealer's frantic efforts to gamble his way out of trouble, the sources said.

It was one of several schemes used by Mr Rusnak to deflect attention and disguise losses after he started losing money five years ago, according to the source who has provided a detailed account of how Mr Rusnak lost $691.2 million in foreign currency dealing while hiding false transactions.

Mr Rusnak's first losses - relatively minor - occurred in spot trades.

Fearing that the treasury desk where he worked might be closed down he began to do forward contracts, making one-way bets while creating false documentation and entries in the bank's system to make it look he was hedging and that his one-man treasury operation was making a profit.

The counterfeit options appeared to give him the right to hedge his losing currency bets if the currency moved the other way. Unlike big banks where there is secure e-mail confirmation of a trade to match it up in seconds, in Allfirst there was not even an independent telephone call, the source said.

Mr Larry Smith, the suspended back-office clerk responsible for verifying Mr Rusnak's trades, has told investigators that his bosses instructed him not to bother verifying trades with Asian banks, according to the Wall Street Journal.

As the losses escalated Mr Rusnak would regularly take a sum like $10 million overnight out of the bank treasury, as carrying costs, and then enter the $10 million as interest on his trading account, and return the $10 million the next morning, the source told The Irish Times.

As the problem got bigger and bigger because of bad bets mainly on the movement of the Japanese yen, Mr Rusnak got the idea of outsourcing his trades, so "all the money would be off Allfirst's books".

In February 2000 he arranged to open prime brokerage accounts with Citibank and Bank of America whereby these banks would clear and settle his trades. This helped Mr Rusnak evade detection from the Allfirst back office. It was highly unusual for a small bank to farm out treasury work in this way.

Working through these banks Mr Rusnak used a foreign exchange product known as "historical-rate rollover" to continue hiding losses. This has been criticised by banking bodies such as the Foreign Exchange Committee which advises the Federal Reserve Bank in New York as a "dangerous practice" because it enables currency traders to hide losses while entailing considerable financial risk. It involves the extension of forward foreign exchange contracts by a dealer at off-market rates.

Mr Rusnak's debts kept mounting. In the year 2000 he lost $211 million. Late in 2000 a big US investment bank declined to buy a currency option from Mr Rusnak because it was concerned about Allfirst's risk management.

Early in 2001, the source said, he was $50 million down on his prime brokerage account at Bank of America.

He found himself forced to make another highly unusual, even desperate, move. He resorted to a "deep-in-the-money" option with the Bank of America - one of four he was to make with four different banks.

This is how it worked. The Bank of America paid Mr Rusnak a premium of $50 million or $75 million to gain an option (known as a "put") on a future trade. It was in effect a synthetic loan - with the bank even checking Mr Rusnak's credit rating as an Allfirst dealer.

The option gave the Bank of America the right to buy US dollars at 70 Japanese yen to the dollar, the source said. "It was a sure loss, but he hoped to win the money back," the source said. At the time the dollar was worth more than 100 yen. Mr Rusnak was betting it would weaken because of the slowing US economy.

The greenback got steadily stronger instead - today it stands at 128.6 yen.

The deal was a "European-type option", i.e. it would be exercised at a specific date, in this case a year later. The Bank of America, Allfirst and AIB have declined to comment on the deal.

Mr Rusnak did not like the deal, and disputed whether a loan interest rate of 2.5 per cent or 3.5 per cent should be applied. He voiced his objections to Mr Michael Bernal, head of corporate foreign exchange sales at Bank of America's San Francisco office - with whom he had attended the US open golf championship at Pebble Beach the previous year, the source said.

To prevent Mr Rusnak pulling out of the deal, Bank of America, whose head of global foreign exchange is Mr Hugh "Beau" Cummins, took it up with the parent bank in Dublin where the head of treasury is Mr Pat Ryan. Mr Rusnak says he was subsequently told by Allfirst's head of treasury in Baltimore, Mr David Cronin - also under suspension - that AIB had ordered the deal to go through. In the end the Bank of America got some $100 million back from the "put" the source said.

Having got $50 million off the books of his previous brokerage account Mr Rusnak then made what was described as a half-forward trade.

"Then he did that the other way on the books at Allfirst so that it looked like he was hedging. He did a reverse transaction that was not true so the $100 million in value on the books - the face value of the "put" - suddenly went away because he fixed the record," the source said.

In the end Mr Rusnak was moving the market. He would typically take a position worth $150 million and then hit four traders at once to sell dollars, the source said.

Mr Rusnak also tried to confuse senior executives at Allfirst using different ways of reporting to different people. Interest calculations were changed so trades wouldn't appear so big. He would show $15 million gross receipts of profit and then write off $13 million in interest so "if you looked up it might be $2 million and if you looked down it might be $15 million".

Questions about his highly unusual activities were deflected by the belief that he was making a profit, the source said.

That illusion was shattered when his counterfeit options were discovered early in February and the Allfirst treasury operation was closed down, probably for good.