For Swiss Banks, an Uncomfortable Spotlight

By NELSON D. SCHWARTZ
Published: March 3, 2009
ZURICH — Banking has long been to this tidy city what cars are to Detroit and computers to Silicon Valley, only more reliably. For while fortunes swung wildly in those places, quietly serving the world’s wealthy made growth here as predictable as a fine Swiss watch.

Until now.

With Switzerland’s biggest bank, UBS, staggering beneath a tax scandal that has undermined this country’s vaunted banking secrecy — as well as $53 billion in write-downs on American subprime securities — not only is Switzerland’s reputation for stability threatened but so is the industry that made it one of the world’s wealthiest countries.

“There is a sense that this is a very, very dangerous situation because the banking sector has been crucial to Switzerland’s well-being,” said Charles Wyplosz, director of the International Center for Money and Banking Studies in Geneva. “If it were to shrink, there is no doubt it would have serious consequences for our standard of living.”

Stability will not return soon. Last week, UBS replaced its chief executive, Marcel Rohner, after only 20 months in the job, choosing the former leader of its archrival, Credit Suisse, Oswald Grübel, to take his place. Pressure is building on Peter Kurer, the chairman of UBS, to step down. In the close-knit world of Swiss banking, speculation is rife that Mr. Kurer, who served in top management roles during both the tax and subprime debacles, could be out within days.

Britain and the United States have spent hundreds of billions shoring up their banks, but Switzerland’s resources are considerably more limited. At roughly $2 trillion, the balance sheet of UBS is four times as large as Switzerland’s gross domestic product.

Over all, Swiss bank assets equal 6.8 times gross domestic product, less worrisome than Ireland’s 9.5 multiple, but still far more than in the United States, where commercial bank assets stand at 70 percent of G.D.P.

What’s more, this alpine wealth haven is set to get another blast of unwelcome attention Wednesday when a Senate panel examines how UBS helped American taxpayers evade the reach of the Internal Revenue Service.

“These abuses have been going on for much too long,” said Senator Carl Levin, Democrat of Michigan, who will lead the hearing and is sponsoring legislation that would crack down on offshore accounts.

Last month, UBS paid a $780 million fine and turned over roughly 250 client names, avoiding a criminal indictment but igniting outrage in a country where bank secrecy — or bank privacy, as the Swiss prefer to call it — is practically an article of faith.

The numbered, virtually anonymous Swiss bank account is the stuff of movie legend and popular lore.

But here it is a bread and butter issue — Switzerland’s financial services sector contributes 12.5 percent of the country’s gross domestic product. That compares to 5 percent from financial services in the countries that use the euro and about 8.5 percent in the United States.

In Zurich, while politicians sputter about how Switzerland is being unfairly singled out and point fingers at British tax havens in the Caribbean and the Channel Islands, UBS executives have a more basic worry: client money is pouring out of the bank’s coffers.

In 2008, clients pulled 123 billion Swiss francs, or $105 billion, out of UBS’s global wealth management business, equal to nearly 8 percent of assets under management. That outflow, along with the drop in value of investments like stocks and bonds in 2008, lowered UBS’s total private assets under management to $1.4 trillion by the end of 2008, from nearly $2 trillion at the end of 2007.

“The main reason was bad publicity and the mistakes we made, not only in trading but in wealth management,” said Mr. Grübel, the new chief executive. “It created uncertainty and mistrust with clients and led to an outflow.”

He admitted that restoring clients’ confidence would not happen overnight. “From my experience it takes up to 12 months for outflows to reverse,” he said.

Referring to the United States tax case, Mr. Grübel added, “We should never have gotten into it, and we should never do something like that in the future.”

UBS shares closed at $8.35 in New York on Tuesday, down from a high of $35.36 last April.

For Switzerland over all, as for UBS, it has been an abrupt fall.

From 2004 to 2007, the Swiss economy grew by nearly 3 percent annually, but in the final quarter of 2008, the economy shrank by 0.6 percent, according to data released Tuesday.

That might not sound like much compared with the 6.2 percent contraction that hit the American economy during the same period, but the possibility of a steeper decline in 2009 is alarming to citizens long sheltered from issues like war and economic instability.

“A 2 or 3 percent contraction is quite exceptional for Switzerland,” said Pirmin Bischof, a member of the Swiss Parliament from the center-right Christian Democratic party.

Mr. Bischof, who studied at Harvard Law School and considers himself an admirer of the United States, said that for ordinary Swiss voters, the biggest issue after the economy was the fate of bank secrecy and Washington’s effort to force UBS to hand over more names.

“It’s a double standard,” he said. “What’s going on now is very difficult to understand.”

For UBS, the fallout from the tax case as well as the boardroom turmoil could not have come at a worse time. Just last fall, the Swiss National Bank agreed to buy $39.1 billion in so-called toxic assets, removing them from UBS’s balance sheet and providing UBS with a $6 billion injection of cash.

And by the beginning of 2009, it seemed as if things were beginning to stabilize, said Urs P. Roth, chief executive of the Swiss Bankers Association. “It was in a turnaround and right at that moment, the Department of Justice decided to force UBS to deliver the information,” Mr. Roth said.

Over the long term, Mr. Roth said Switzerland would retain its position as a global wealth haven despite the pressure to provide more names to American authorities, and competition from even less regulated locales like the Cayman Islands and the Channel Islands.

“Bad cases are always a blow to reputations,” he said. “But we are quite confident that the reputation can be maintained and built up again.”