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Rogue trading saga hits NAB hard

Australia's largest bank has suspended the four currency options traders.
Australia's largest bank has suspended the four currency options traders.

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MELBOURNE, Australia (Reuters) -- National Australia Bank has warned that unauthorized trading by four currency options dealers could cost the bank as much as A$600 million, more than triple its original estimate.

Australia's largest bank's revelation of rogue trading raised concerns about its risk controls and marked the latest in a series of blunders over the past three years, the largest of which resulted in $2.2 billion in writedowns on its U.S. HomeSide mortgage servicing arm in 2001.

"This is a core competency for a bank. For it to blow up the way it has doesn't say very much about how the place is being run," said Deutsche Asset Management analyst Shawn Burns.

The bank, which last week said it faced pre-tax losses of up to A$180 million from unauthorized trading, raised the loss to at least A$185 million as it removed "fictitious" in-house trades from its foreign exchange options book. It said it was now revaluing its remaining currency options portfolio.

"Our initial view indicates that this revaluation will lead to additional losses. Based on our work to date, there is a very low probability that the total losses will be as high as market speculation of A$600 million," the bank said in a statement.

The bank suspended four currency options traders last week -- head of currency options Luke Duffy, David Bullen and Vince Ficarra in Melbourne and Gianni Gray in London -- after a position turned sour.

Duffy and Bullen were unavailable for comment.

The position put on last October was based on a belief that the Australian and Kiwi dollars would correct after prolonged rallies against the U.S. dollar. Sources told Reuters the traders were selling highly leveraged call options on the Australian and New Zealand currencies, but both continued to rally strongly.

The Australian and Kiwi dollar gained 34 and 25 percent against the U.S. dollar last year. They both rose 14 percent from October 1 to January 13, when the bank revealed the foreign exchange losses.

Loose controls?

The scandal evoked memories of the $690 million losses on yen-dollar trades that were hidden for five years at U.S. group Allfirst Financial, then a subsidiary of Allied Irish Bank, which led to a 7 1/2-year jail term for trader John Rusnak last year.

Those losses were half the amount racked up by rogue trader Nick Leeson in unauthorized derivatives trades which triggered the collapse of Britain's Barings Bank in 1995.

Fund managers said they would wait and see the outcome of NAB's review before they started marking down earnings forecasts for beyond 2004, but said a loss as large as A$600 million would come as a shock to the market.

"The materiality is not great at A$185 million. But a A$600 million loss would be a considerably more material event, in which case you'd certainly have to question risk controls within the organization," said a fund manager in Sydney.

Tighter risk limits would likely reduce trading earnings, fund managers said, but it was hard to gauge what impact that would have on overall earnings because they did not know how profitable NAB's currency options trading had been in the past.

Unauthorized trades under review in the remaining portfolio were real trades with counterparties, involving the Australian dollar, New Zealand dollar and some other currencies.

The bank, which posted a net profit last year of A$3.96 billion, would give an update by the end of the week.

NAB shares closed down 0.3 percent at A$29.84, taking their decline since the trading irregularities were first disclosed to about 3.4 percent and wiping about A$1.6 billion off the bank's market capitalization.

Copyright 2004 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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