The Americanization of UBS
By Robert E. Bauman
April 07, 2008
What are we to make of the crass stupidity and misjudgment on the part of the mismanagers of the United Bank of Switzerland — UBS!?
Whatever happened to that much vaunted, world famous Swiss reputation for financial integrity and careful, conservative investments?
Last week UBS — with $3.1 trillion in assets, Switzerland’s biggest bank — announced that it was taking an additional US$19 billion loss charge that brought UBS’s total write-downs to nearly $40 billion — more than any other bank in the world — and UBS expects to post a first quarter loss of $12 billion. A few weeks ago UBS had to be bailed out with a $13 billion cash infusion from the Government of Singapore Investment Corporation and an “unidentified Middle Eastern investor.” But its plans to raise new capital have not quashed fears that the bank, based in Zurich, was facing deeper threats because of its subprime mortgage woes.
UBS’s problems of the last year are a stunning reversal for an institution long known for its staid, conservative style. Beginning in 2005, UBS made a huge bet on mortgage securities, seeking the higher yields they offered and trusting that the AAA ratings they bore would protect the bank from outsize losses. Eventually, UBS’s mortgage portfolio topped $100 billion.
(Peter Voser, CFO of Royal Dutch Shell Plc joined UBS in 2005 – information added by John Donovan of www.royaldutchshellplc.com)
Reputation Is Everything
A well known global survey of private banks published by PriceWaterhouseCoopers (PWC) a few years ago found that the major attraction for a bank’s new customers is its reputation.
Up until now, I was able to write and say with a straight face: “Certainly Switzerland’s solid financial reputation is what has made this impressive nation ‘banker to the world,’ a unique role it has played successfully for centuries.”
The late Margaret Mitchell (1900 – 1949), author of the American civil war classic, Gone With the Wind, once said: “Until you’ve lost your reputation, you never realize what a burden it was.” Well, UBS certainly no longer has the burden of a good reputation and it will be a long time before it regains it — if ever.
Irate Swiss
In February 6,000 plus shareholders of UBS packed their annual meeting to vent their fury over the billions in losses on American subprime mortgages and what they saw as an insult to traditional Swiss values of prudence and thrift. Much of their anger was aimed at the United States itself — specifically an addiction to high-octane risk-taking, easy credit and dubious financial assumptions that created the American domestic mortgage mess.
“The American El Dorado has become a scene from a Western,” declared one middle-aged shareholder, Therese Klemenz. “UBS was the figurehead of Swiss business. As a good housewife, I know you shouldn’t put all your eggs in one basket. A bank is not a casino.”
Thomas Minder, a local shareholder activist, was even more outraged. “What happened here is a scandal,” he thundered. “You’re responsible for the biggest loss in the history of the Swiss economy. Put an end to the Americanization of the Swiss economy!” At that point, Mr. Minder charged the podium, only to be dragged away by security guards.
Herr Minder was on to something — with 30,000 employees in the U.S. and billions in American deposits, the truth UBS doesn’t want to admit is it has become an American bank — adopting the same reckless attitudes that dragged down Citibank and destroyed Bear Stearns.
What UBS did was total un-Swiss and is hardly representative of the vast majority of other Swiss banks.
Not Our Favorite Swiss Bank
Long time members of the Sovereign Society know that we never have recommended UBS as a Swiss bank for offshore accounts — and that was not only because of its monster size and impersonal service. What concerned us is the UBS anti-privacy policy.
The merger of Swiss Bank Corp and Union Bank of Switzerland creating UBS AG was approved by the U.S. Federal Reserve Board in 1999 — but only after UBS supinely agreed to provide the U.S. government with all information “necessary to determine and enforce compliance with . . . [U.S.] federal laws.” This surrender went far beyond the financial information required to be exchanged under the existing U.S.-Swiss Tax Treaty and it also nullified Swiss bank secrecy laws that usually require a court order to release private banking information.
UBS caved in after the U.S. government threatened to shut down the bank’s extensive American financial operations. The UBS sell out was bad news for financial privacy seekers – and it blew a large hole in the much vaunted concept of Swiss “bank secrecy.”
Then and now we advise U.S. and other potential depositors to avoid UBS AG and any Swiss bank that has active U.S. financial operations and offices beyond a mere “representative office.” (A similar privacy killing deal was made between the Fed and Credit Suisse when that leading Swiss bank merged with First Boston).
Switzerland Still Stands Firm
Historically, there has long been a widespread belief that Switzerland is the place to safeguard cash and personal assets, especially in times of trouble. We think that still holds true.
Notwithstanding UBS, it is estimated that currently Swiss banks manage at least one third of all assets held offshore by the worlds wealthy. Total cash assets of the Swiss banking system are estimated at nearly $2 trillion, while the value of total securities deposits are well over $3 trillion. Assets under Swiss management have risen significantly in recent years, reaching a high of nearly US$4 trillion in 2007, according to the Swiss National Bank and the Swiss Bankers Association.
Of far greater significance are the country’s political, financial and economic stability and strength. Many of the world’s leading companies and hundreds of thousands of non-Swiss persons bank with the Swiss. Even the international intermediary banking institution for all other banks in the world, the Bank for International Settlements, is located in Basle, Switzerland.
Switzerland still is home to several hundred banks, including many small private and regional banks and more prudent large banks such as Bank Julius Baer, with branch offices in most of the world’s financial centers, from New York and Panama to Singapore and Hong Kong.
If nothing else, the UBS debacle is a stark warning to other Swiss bankers to stay with their traditional principles and, by all means, avoid Americanization.
* I have just published my latest book, Swiss Money Secrets, which explores in detail Swiss bank secrecy, low taxes, possible residence for foreigners and many other aspects of Swiss history and current policies. For your copy, click here:
http://www.web-purchases.com/190SSMON/E190J355/landing.html
About the author…
Robert E. Bauman is a former Member of the United States House of Representatives from Maryland, (1973-1981). He is also a former federal official and state legislator; Member, Washington, DC Bar; Graduate of the Georgetown University Law Center (1964) and the School of Foreign Service (1959), Washington, DC. Robert currently serves as legal counsel for the Sovereign Society.
Robert is editor of The Sovereign Society Offshore A-Letter; and authored or co-authored Forfeiting Our Property Rights, The Cato Institute, (1995) (with Hon. Henry Hyde); The Offshore Money Manual 2000, Sovereign Society, (1999); The Oxford Club Wealth Protection Series, (1995-00). He also edited Forbidden Knowledge, (Sovereign Society 1999), authored The Complete Guide to Offshore Residency, Dual Citizenship and Second Passports, Sovereign Society, (2000); and has written articles and reviews for The Cato Institute and The New York Times, The Washington Post, Los Angeles Times, The Baltimore Sun, The Wall Street Journal, and National Review. Robert has also been interviewed on CNBC for his insights on offshore havens.
http://baumanblog.sovereignsociety.com/2008/04/the-americaniza.html
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Commenting as a long-term UBS employee, I can tell you the Americanization was not greeted without strong resistance within the bank. Disappointingly however, the US business units quickly gained an unassailable level of political power thanks to the massive, but risky profits they were able to make. Anyone who stood in their way did not survive long within the bank. And trust me, questions were raised strongly within the European divisions until there were few left with the courage to stand up. The risk was blindingly obvious for a long long time, but there was simply too much money being made and regulatory staff raising concerns learned rather quickly to shut their mouths. Personally, I believe the US divisions should be ruthlessly cut and UBS should return to a more trustworthy and honorable path, but the fact is, EU and APAC staff will suffer significantly in any layoffs (in fact they have already) as the US teams use this as an opportunity to to consolidate their power through token local layoffs and targeted EU dismissals.