Currency’s Volatile World

Jake Lee scans three computer screens flashing numbers, charts, graphs and news bulletins from around the world. A squawk box nearby shouts prices from brokers in New York.

In a second, Lee makes a bet. “Thirty-four,” he calls out, placing an order to sell several hundred thousand euros to a customer for 87.34 cents to the dollar. Lee doesn’t own the euros he’s selling, so he starts hunting for the European currency at a lower price, hoping to cover the deal and give his bank a gain.

“If you’re making money, it’s a good day,” said Lee, a 35-year-old native of South Korea. “If you’re not, it’s miserable.”

Lee and his fellow traders at Union Bank of California in downtown Los Angeles make several hundreds of such transactions a day, usually totaling around $200 million, making Union the biggest currency trader in Southern California.

Though the action is fast-paced and overall volume large, the regional bank, like most major foreign exchange operations, has increasingly minimized risk by hedging bets, limiting amounts of typical trades, employing rigid checks and balances and turning to salespeople, not traders, to pull in customers.

But as last week’s $750-million debacle at Baltimore’s Allfirst Bank showed, the world of currency trading is in some ways still the Wild West of the financial markets, as one trader put it. Unlike the New York Stock Exchange and other major markets, the world’s biggest financial market is governed by no regulatory body.

“There are no licenses we have to hold and no restrictions on us as individuals or as businesses, except what we put on ourselves,” said Johannes “Johs” Worsoe, who manages Union’s global markets trading and foreign exchange staff of 20.

Currency trading has been far less volatile than the roller-coaster days of the Asian and Russian economic crises a few years back. But traders around the globe still move roughly $1.2 trillion worth of currencies a day. And in the trading pits at banks and other institutions, even a swing of few tenths of a penny can be big if huge amounts are wagered, as was the case with former Allfirst trader John M. Rusnak.

Over the last year, traders say, Rusnak allegedly bet $50 million to more than $100 million at a time--much of it the bank’s own money--mainly on the hope that the Japanese yen would rise in value against the dollar. But with Japan’s economy in a persistent recession, the yen fell 14% last year.

Allfirst, a subsidiary of Allied Irish Banks in Dublin, Ireland, says Rusnak, 37, ered up mounting losses by creating bogus option contracts that were supposed to hedge against big deficits. His exploits hark back to the days of rogue trader Nicholas Leeson and macho world that came to be identified with currency trading. Leeson’s $1.4 billion in concealed losses destroyed Britain’s Barings Bank in 1995.

Back then and in previous years, individual deals involving $100 million were not uncommon, and “there was a lot of yelling, screaming and hand signals--and a lot of mistakes,” said Lan Yee Chan, a 25-year veteran who is Union Bank’s chief trader.

Today, computers, the Internet and other electronic tools move deals along quietly, quickly and more accurately--although traders also conduct deals verbally. Currency trading desks at major banks, hedge funds and other investment houses have imposed such tight internal controls--especially since Leeson--that a mistake doesn’t go undetected for long.

That’s why veteran traders found the Allfirst scandal mind-boggling and in some ways anachronistic.

Like many institutions, Union Bank has severely curtailed the amount of its own money used in currency trading. Such proprietary trading, which Leeson and Rusnak engaged in, puts the risk squarely on the bank and turns the trading room into a pressure cooker.

Instead, most banks and traders take a far more conservative, risk-averse--and less stressful--path. They exchange currencies on behalf of customers, such as a U.S. citizen traveling abroad or a Hollywood studio seeking a million euros to film on location in Paris.

The customers buy the foreign money from the bank at whatever exchange rate is pending at the time, and the bank takes on only the risk of fluctuating rates.

“You don’t create shareholder value by gambling your company’s money,” Worsoe said.

The bank primarily trades for its customers, rather than speculating to make big gains. The bank nonetheless bears some risks. For example, if a customer wants $10 million worth of euros, Union sells at the current exchange rate, hoping that the euro will decline soon so the bank could pocket a profit. But the bank also could cover the risk of the euro rising in value by buying options to repurchase dollars.

Worsoe’s department added nearly $30 million to the bank’s $2.2 billion in revenue last year, but the bank sees more value in attracting and keeping customers.

At 34, Worsoe already has 15 years of experience as a currency trader. He started on the trading floor at a bank in his native Denmark when he was 18, and then worked at the bank’s U.S. operation, the National Bank of Long Beach, before moving to Union.

Worsoe remembers what it was like a decade or so ago, when the stress from the job burned out many traders at a young age. Even today, he says, traders often move up to management or into other areas within 10 years .

Worsoe, Lee and others at Union have college degrees, but for an industry in which higher education has never been a prerequisite, traders are paid well. At Allfirst, Rusnak earned a salary of $85,000 plus bonuses that hit as much as $200,000 a year. Union Bank pays bonuses of $10,000 to $300,000, but gives the bigger bonuses to salespeople, not traders.

As with most institutions, Union Bank has set up walls between the trading side and the operations side, which confirms the orders made. A monitoring group oversees both operations. And the heads of each section have no authority in the other sections and can’t get into each other’s computer systems. The structure is aimed at minimizing risk, preventing unauthorized trades and ensuring, at least in theory, that no one can hide anything.

Indeed, Allfirst had a similar safety net, but officials don’t know yet how Rusnak, with authority only for trading, made false entries in the operations side about option contracts that didn’t exist. The FBI and regulators are investigating.

Unlike the Barings collapse, the failure at Allfirst hasn’t caused Union and other banks to revamp their controls. Worsoe said he’s confident that there are adequate safeguards in place, including spending limits for traders, though he wouldn’t specify the amounts.

At Union’s trading section, the day begins at 5 a.m. The staff gathers at 8 to go over global events that might affect currencies. During the 15-minute meeting, they enter about a dozen transactions, and about 60 more come in from bank branches.

Then the day’s work begins in earnest as the salespeople work the phones to call customers and the traders get back to the open deals on their screens and the information they must monitor constantly.

With all the money floating around, the traders have to reduce their open positions--deals that aren’t closed yet--to about $2 million before they go home. As they sleep, colleagues at other institutions around the world watch Union Bank’s open positions, ready to close them to avoid big losses. Lee and co-workers Jeff Sakamoto and Chan do the same for them.

Typically, traders bundle up smaller deals to make one bigger transaction. A package of deals worth $2 million can bring the bank a profit--or a loss--of $2,000 with a swing of just a tenth of a cent.

And some deals still can make veterans nervous, especially in positions open overnight.

“Some guys go home with $20million still at stake. I don’t know how they do it,” said Sakamoto, 38, an 11-year veteran. “I couldn’t sleep at night.”