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8 | Letter from America
aggressively to restore confidence by replacing
its chief executive and chairman respectively
with a former Credit Suisse CEO and a for-
If Swiss banking privacy
mer Swiss finance minister. Banks have cer-
tainly survived bigger setbacks in the past and
managed to survive, and we believe that UBS,
though wounded, will retain its place among
the world’s elite financial institutions. That
could survive pressure
said, its scale and scope will almost certainly
be reduced, both on the asset side—possibly
involving greater regulation of the credit risks
being taken and the amount of leverage
from Nazi Germany, one
used—and the deposit side—almost certainly
involving additional curtailment of offshore
financial services to Americans and citizens of
various other countries.
would think it would
Is Switzerland’s Financial
Stability at Risk?
The problems facing UBS have essentially cre-
ated two distinct risks to Switzerland. The survive the US Justice
first is the potential loss of banking privacy
due to the bank’s confrontation with the U.S.
Justice Department. Ivan Pictet, president of
the Geneva Financial Centre, estimated in an
Department
interview with a local Swiss paper that the
loss of banking privacy could reduce assets
managed by up to one half. Even if Mr. Pictet
is overestimating the potential damage, the roughly four times the size of Switzerland’s complaint. UBS has until April 30 to prepare
fact remains that, in this new world of mobile GDP. Were UBS an American bank, its bal- its defence for the civil trial that would take
capital, offshore investors can easily find a ance sheet would be less than 15% of GDP. place on July 13.
new destination for their money. We consider Needless to say, a UBS “blow up” would be Many Swiss are justifiably outraged by the
this the primary risk facing the country and catastrophic to Switzerland’s financial US Administration’s actions, accusing the
the focus of this article. stability. Americans of negotiating in bad faith. They
The second issue is the threat toSwitzerland’s accuse the Americans of demanding an end to
currency and financial stability due to aggres- Banking Privacy Under Siege Swiss banking privacy while the US itself—
sive lending and investing done by the coun- Let us now return to the focus of this article, particularly in the case of Delaware corpora-
try’s two global banks—UBS and Credit the US Justice Department suit against the tions and LLCs—continues to offer privacy
Suisse. In a widely circulated article in the bank. By UBS’s own admission, the bank havens of its own. To many Swiss, compro-
Swiss newspaper Tagesanzeiger, economist overstepped the bounds of typical Swiss dis- mising banking secrecy is tantamount to
Arthur Schmidt argues that Switzerland faced cretion in becoming a little too brazen in compromising Swiss national sovereignty, and
the prospect of national bankruptcy due to helping American account holders hide assets. the UBS civil suit is nothing short of a hostile
the exposure of its banks to bad loans in Swiss law makes a clear distinction between act of aggression. UBS could potentially lose
Eastern Europe. Schmidt argued that a large- tax evasion and tax fraud, the former being its ability to conduct business in the United
scale bailout of the two banks by the Swiss merely a civil offense while the latter an actu- States, and it could also be held in contempt
National Bank would cause a collapse in the al crime. Failing to report offshore income of court, resulting in new fines and possibly a
value of the Swiss franc, reducing it to the would be considered tax evasion to the Swiss, reopening of the criminal case. It is unclear
status of a weak currency. whereas actual tax fraud generally involves how Switzerland would respond to such a
Thus far, Mr. Schmidt’s fears appear to be more aggressive tactics, like the falsification of development. Cooler heads may yet prevail,
wildly overblown. Forbes reports that Swiss documents. There is clearly a difference and the US Justice Department may yet scale
bank loans to Eastern Europe were only $75 between discreetly failing to ask questions back its demands. But for now, we appear to
billion and, according to the Swiss National and actually offering assistance in breaking be heading for confrontation.
Bank, posed no risk to the currency. The the law. In the criminal case that was settled On March 8, the Swiss justice minister said
Swiss franc managed to survive the write- by UBS surrendering the account information in no uncertain terms that UBS would not be
down by UBS of (thus far) $53 billion in US of 250-300 Americans, both Swiss and allowed by the Swiss government to release
mortgage-related securities, keeping its status American authorities agreed that UBS crossed the 52,000 names. With the April 30 dead-
as a hard currency intact. It would seem that that line. line—and the G20 meeting—approaching,
this aspect of the crisis is containable. The civil case is another story altogether. the pressure is certainly building.
Still, there appears to be a growing consen- The very next day after the high-profile crim- If Swiss banking privacy could survive
sus in Switzerland that UBS and Credit Suisse inal settlement, the US Justice Department pressure from Nazi Germany, one would
have become simply too large and that their filed a civil suit against the bank demanding think it would survive the US Justice
size must be reduced in order to avoid being a the identities and records of 52,000 American Department. This is by no means certain at
risk for Switzerland in the future. At approxi- account holders—nearly triple the 19,000 this point. The next few months will be
mately $2 trillion, UBS’s balance sheet is under investigation in the original criminal telling.
March 2009 Investment International www.investmentinternational.com
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