And now for the disclosure that is in the public domain which NOT exactly support your argument:
Australia’s largest bank and second biggest company, the National Australia Bank (NAB), has faced continued instability, including the resignation of both its chairman and chief executive officer, since it announced on January 13 that it had lost hundreds of millions of dollars in foreign currency trading. The spectacular losses reflect the increasing reliance by the NAB and other global corporations on speculation and high-risk investment activity to maintain profitability.
On March 12, the NAB sacked or forced the resignation of eight senior staff, disciplined or moved 17 others and restructured its board of directors in its latest attempt to appease investors and stem the slide in its share price. The measures followed the bank’s release of a report by the accounting firm PricewaterhouseCoopers (PwC) into how the losses occurred.
The report revealed that the financial damage could have been far greater, with the potential to trigger the worst banking crisis in Australian history. The NAB’s currency traders had breached trading limits on 800 occasions and, at one stage, had unhedged foreign exchange exposures of more than $A2 billion.
This is a far cry from the situation reported in January, when the NAB initially announced losses of $180 million, only to be forced to double that figure a week later. The bank blamed the losses on “unauthorised” trading by “rogue” employees at its foreign exchange options desk. While accepting this version of events, the PwC report pointed the finger at the NAB’s poor risk management and checking mechanisms.
Both the bank and the PwC report assert that this high-risk activity was not a strategy of the bank. “It’s not a systemic problem,” the NAB’s recently installed CEO John Stewart declared. However, information revealed in the report and from other sources over the past two months contradicts this assertion.
The NAB originally reported that an employee from outside the foreign exchange options section of the bank had detected and reported losses from unauthorised foreign exchange options trades between September 2003 and January 2004. Before any investigation, the NAB immediately stood down the four traders in the section, effectively making them scapegoats.
It soon emerged, however, that the NAB was trading at levels far higher than its official risk caps. The major Australian banks usually calculate their exchange option financial exposure by a Value at Risk (VaR) formula, which calculates the maximum probable losses that could result at any one time. The NAB’s foreign exchange options cap was $3.25 million, which meant that the ultimate loss of $360 million was 110 times the maximum VaR.
According to the PwC report, the irregularities dated back to 2000 at least. The report found that the foreign exchange team had increasingly upped the risks of the trades in order to recover initial losses. The team’s desk bet heavily that the Australian and New Zealand dollars would fall against the US dollar, and bought and sold options accordingly. >From August 2003, both currencies rose against the US dollar—the Australian by 14 percent.
In order to hide their losses, the traders entered false transactions to the value of $5.5 million in August. This figure accumulated to $42 million in September, $92 million in October and $360 million by January.
Claims by NAB senior management that it did not know about or support the risk taking have been undermined by a number of sources.
The options team had already breached daily VaR limits hundreds of times during 2003 and these breaches were authorised each time by Garry Dillon, joint head of foreign exchange trading. The breach figures, which did not include the concealed losses, were sent to the general manager of the Markets Division and other staff. However, according to the PwC report, they were never investigated.
The traders were making large and unusual trades, which must have been obvious to senior management. The options team made $42 million in one day, when it was budgeted to earn around $30 million in the year. Two large commercially unviable trades with another bank in October 2003 were reported by staff to the bank’s Market Risk and Prudential Control section. But it accepted the traders’ explanation that the deal was to boost the section’s cash resources.
Even warnings from a rival bank, the ANZ, were ignored. In March 2002, the ANZ raised concerns about the erratic deals the NAB was making. NAB representatives threatened to end dealings with the ANZ if it raised its concerns within the foreign exchange industry.
David Bullen, one of the four currency options traders told the Australian Financial Review that the NAB tolerated the breaches of the risk limits because the team had made important profits for the company. He said NAB had earned between $25 million and $45 million each year for the past three years from the currency options desk, making it the most profitable team in Australia. The NAB paid Bullen a bonus in January of $215,000, more than doubling his annual salary, while his colleague, Luke Duffy, received an extra $265,000. Gary Dillon received a bonus of $500,000.
Bullen rejected former NAB CEO Frank Cicutto’s claims that the traders’ behaviour did not reflect the bank’s culture. “All they ever really wanted was for money to be made, and the way that came about was secondary,” he said. “As long as you make money, it doesn’t really matter how that money came about.” The bank’s annual reports suggest that the increasingly risky trading was a conscious policy. The average VaR in September 1999 stood at $3 million, but by March 2000 it had risen to $8 million and then $10 million by September 2000. Over the same 12-month period, the maximum VaR rose from $5 million to $20 million. In an attempt to mask the risk taking, in 2000 the NAB dropped its usual practice of providing year-on-year comparisons in annual report figures....etc,etc.
Absolutely - fraud and poor risk management. Agree, one should short any company involved in fraud.
