Friday, 10 July 2009 01:00

It is amazing that a battle of sovereign nations over banking has not received more press

From the NY Times...

When the Swiss bank UBS and federal prosecutors face off in a Florida courtroom on Monday, the focus will be whether UBS must disclose the identities of thousands of its American clients, but much more could be at stake as well.

The dispute, in which the Internal Revenue Service, backed by the Justice Department, is trying to force UBS to hand over the names of 52,000 wealthy American clients suspected of tax evasion, has escalated into a showdown that has frayed relations between Switzerland and the United States, peeled back layers of Swiss banking secrecy and rattled the world’s private banking industry. UBS and the Swiss have intensified their opposition this week, threatening to send more ripples through the global banking system.

Oswald J. Grübel, the chief executive of UBS, sent a memorandum to the bank’s top executives on Thursday saying that turning over the names “would require UBS to violate Swiss criminal law, and we simply cannot comply,” according to a copy of the document.

On Wednesday, the Swiss government said that it would block any move by UBS, Switzerland’s largest bank and a bulwark of the country’s economy, to turn over the names should it be ordered to do so. Such a decision could come as early as Monday by the judge overseeing the case. The country contends that complying with such an order would violate Swiss law.

“If necessary, the blocking order is ready,” Urs Ziswiler, the Swiss ambassador to the United States, said in an interview in New York on Wednesday.

Any such order could imperil the ability of UBS, the world’s largest private bank and a big player in the global credit markets, to operate, as well as potentially subject executives to criminal prosecution, and the bank to sanctions, in Switzerland.

“The I.R.S. summons puts UBS in an untenable position, caught between the laws of two sovereign nations,” UBS said in a statement on Thursday. “Honoring the I.R.S. summons would require UBS to violate Swiss criminal law.”

Further heightening the tension, the judge overseeing the case, Alan S. Gold of Federal District Court in Miami, has ordered prosecutors and the I.R.S. to consult the Obama administration and the State Department and to explain by Sunday how far the government is willing to go if UBS refuses to disclose the names. The judge wants to know whether it would consider seizing assets of UBS in the United States or force it into receivership, a form of bankruptcy with a court-appointed trustee.

Charles Miller, a Justice Department spokesman, declined to comment on Thursday. In February, the I.R.S. sued UBS to compel it to turn over the names, just a day after UBS agreed to pay $780 million to settle criminal accusations that it had defrauded the I.R.S. by allowing wealthy Americans to hide billions of dollars in taxes in secret offshore bank accounts. The bank admitted to wrongdoing.

Since then, the controversy has threatened to lift the veil of Swiss banking secrecy, which has driven a vast wealth-preservation industry that over decades has made Switzerland the world’s largest repository of hidden wealth. If Switzerland caves in on this, it will destroy the Swiss banking business. They are not that competitive in other fields. If the Swiss banking business falters, it puts Switzerland itself in jeopardy since the assets of and liabilities of the industry outstrip the GDP of the actual country. If the US caves, they will be challeneged in other areas as well. Very interesting...

UBS turned over about 250 client names as part of its settlement but has pushed hard to have the civil names case dropped. While the bank has legal avenues to challenge any ruling by Judge Gold, exhausting those options and still refusing to divulge the 52,000 names could subject it to indictment.

The showdown has prompted Swiss ministers and officials to conduct an lobbying campaign in recent weeks in the corridors of the Treasury Department, the Federal Reserve and K Street lobbying firms in Washington.

As part of the campaign, Swiss officials have raised the specter of global financial instability should the civil case continue to be litigated, rather than settled, either before or after the hearing on Monday. Last month, a United States official briefed on the matter said that the Justice Department was considering a settlement.

“It’s ongoing negotiations, and we’re not talking about it,” Mr. Ziswiler, the Swiss ambassador, said. Referring to the 52,000 names, he added: “It’s just a number. We don’t know how many people have actually declared their income correctly.” So, the big question is, who will get sold out, and when? My bet would be those with accounts under $50 million will get fed to the tax dogs... Social stratification, international banking style!

Both Mr. Ziswiler and a UBS spokeswoman, Karina Byrne, said that UBS was not willing to pay a fine to settle the names case in addition to the $780 million settlement. Ms. Byrne added that a plan by UBS to raise $3.5 billion in capital, announced on June 25, had no connection to the names case and would not be used to settle it out of court. Beef???!!!

Referring to a possible settlement, the Swiss minister for economic affairs, Doris Leuthard, who is also vice president, said on Wednesday in an interview in New York that the longer the case lasts, “the bigger the chance that UBS is suffering,” adding “financial instability could be threatened. A big bank with a severe problem will hurt the stability of the financial markets and the global economy, and this is one element that should be considered.”

The case has taken its toll on UBS, whose core businesses also include investment and corporate banking. James Odell, general counsel for UBS’s investment bank in the Americas, said Wednesday in a brief interview that “it’s an overhang that’s best to get rid of.”

URL: http://www.cnbc.com/id/31842253/

Last modified on Friday, 10 July 2009 01:00

17 comments

  • Comment Link Rumi Monday, 13 July 2009 16:54 posted by Rumi

    /"As part of the campaign, Swiss officials have raised the specter of global financial instability should the civil case continue to be litigated, rather than settled, either before or after the hearing on Monday."

    Sound to me that UBS and Paulson have the same speech writers. /

    So Does CIT:

    http://www.bloomberg.com/apps/news?pid=20601109&sid=aHKDW8rEvwDM

    I think GM said something earlier, as well.

    I wonder if the guy who came up with this gets royalties from each person who repeats it.

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  • Comment Link Gunther Monday, 13 July 2009 10:11 posted by Gunther

    Reggie,
    the difference is that your own money is at stake, not the money of a customer. That gives an incentive to do quality research.
    Gunther

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  • Comment Link Reggie Middleton Sunday, 12 July 2009 23:55 posted by Reggie Middleton

    @NDbadger:
    I have no knew research or opinion on ACC, I was just going to illustrate the difference between my research efforts and that of one of Wall Street's big brokerage/investment banks. You will be surprised at the differenc in sophistication and effort between the two.

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  • Comment Link Woodstock Sunday, 12 July 2009 15:18 posted by Woodstock

    "As part of the campaign, Swiss officials have raised the specter of global financial instability should the civil case continue to be litigated, rather than settled, either before or after the hearing on Monday."

    Sound to me that UBS and Paulson have the same speech writers.

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  • Comment Link gwooger101 Sunday, 12 July 2009 11:16 posted by gwooger101

    What ever happened with those bearer bonds (in Billions) that got caught at the border of Switzerland? Maybe they were intended to pay back UBS for their problems. Just a thought....

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  • Comment Link gmm95219 Sunday, 12 July 2009 10:49 posted by gmm95219

    " I have never seen a reverse stock split which did not result in the stock tanking after wards"
    one should never say never.
    I have quite a few call options of FAZ and if the financials are in trouble I expect FAZ to go up after split.

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  • Comment Link NDbadger Saturday, 11 July 2009 21:33 posted by NDbadger

    you recently mentioned putting out a note on ACC. I was wondering if you are still planning to?

    thanks,

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  • Comment Link mattg Saturday, 11 July 2009 01:18 posted by mattg

    There are reasons other than tax evasion why one might in the past have chosen a Swiss bank. But those reasons no longer apply. The Swiss no longer look prudent and long-term-oriented. And the special nature of the client/banker relationship has been destroyed. Consider, for example, the way UBS stonewalled clients whom they had lured into investing in auction rate securities--even though UBS employees had dumped their ARS while they were pushing them to widows and doctors. UBS will never regain the trust of its customers.

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  • Comment Link shaunsnoll Friday, 10 July 2009 15:57 posted by shaunsnoll

    check out this company with a good track record that is short LRN. i think they're wrong but may be worthwhile to get a hold of that report (free trial?) just to get their view. opposing viewpoints are more useful than agreement in my view.

    http://online.barrons.com/article/SB124657282666888819.html

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  • Comment Link NDbadger Friday, 10 July 2009 14:27 posted by NDbadger

    have you written anything on BAC recently? Seems like that one could easily see single digits again.

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  • Comment Link Gunther Friday, 10 July 2009 14:07 posted by Gunther

    Reggie,
    Thank you for pointing out this story.
    To me there seems more behind it then what is told. Switzerland as tax shelter is old news, but that they get prosecuted is new, especially since there are different possibilities to avoid taxes. Liechtenstein comes to mind, and the British Channel Islands have strong finance industry too. As far as I know it is possible to set up anonymously a corporation in Delaware to evade taxes; there are discreet Caribbean banking places too.
    How to evade taxes is not my area of knowledge, but these places got enough reporting that I know of them. Only Switzerland is in the crosshairs.
    Is that story really about something else?
    The stakes for Switzerland are huge, Swiss GDP is 410 billion US$, the balance sheet of UBS is 1800 billion US$. A breakdown of UBS threatens Switzerland’s existence; possibly even the worlds financial system. See what the gnomes of Zurich can do to defend themselves.

    Sources:
    http://www.finanzen.net/bilanz_guv/UBS for the balance sheet numbers, multiplied by 0.92 to convert to US$.
    http://www.europa-auf-einen-blick.de/schweiz/index.php
    (To get the GDP I multiplied GDP per capita by the number of inhabitants)
    http://en.wikipedia.org/wiki/Liechtenstein
    http://en.wikipedia.org/wiki/Channel_Islands

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  • Comment Link NDbadger Friday, 10 July 2009 13:28 posted by NDbadger

    the reverse split allowed shorts to enter whereas previously many couldn't because their broker wouldn't have allowed them to short penny stocks. it's quite comical. strange that the fed hasn't handed this over to a bankrupcy judge to unwind, but the fed doesn't trust the system. this stock is almost certainly worth nothing.

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  • Comment Link alen Friday, 10 July 2009 11:45 posted by alen

    if UBS doesn't want to follow US laws they should close all their offices here and do business only from outside the USA. the Swiss are fighting this because it seems their country only exists financially because their laws allowed others to avoid paying taxes in their home countries. once there is no reason to keep money in swiss banks, then the swiss economy is in trouble.

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  • Comment Link shaunsnoll Friday, 10 July 2009 11:31 posted by shaunsnoll

    LRN = hugggge short squeeze?

    http://seekingalpha.com/article/148038-short-idea-k12-inc?source=email

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  • Comment Link Reggie Middleton Friday, 10 July 2009 10:09 posted by Reggie Middleton

    I have never seen a reverse stock split that didn't result in the stock tanking afterwards. It was a bad move.

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  • Comment Link RobieB Friday, 10 July 2009 09:53 posted by RobieB

    UBS cannot afford to lose this case. They are speaking in related news about raising capital or divesting themselves of assets. We can always look outside the US to find news not quite so manipulated. UBS is in big trouble and the IRS case must be pushed forward because the US is secretly in big trouble. We need the money from those accounts.

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  • Comment Link Peter Friday, 10 July 2009 09:43 posted by Peter

    Hi Reggie,

    rather off topic but I thought more than intersting to observe. Could you enlighten us what the hell is going on with AIG's stock price? The government is loosing big time on their investment. How come no coverage by the media. The stock is down again -10%. Since the reverse split the stock lost almost 65% and this just in a couple of days -

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