As UBS saga continues, Swiss banking is shaken By Nelson D. Schwartz Published: March 4, 2009

ZURICH: Banking has long been to this tidy city what cars are to Stuttgart and computers to Silicon Valley, only more reliably. For while fortunes swung wildly in those places, quietly serving the world’s wealthy made life here as predictable as a finely tuned Swiss watch.

Until now.

Less than a week after naming a new chief executive, UBS moved to replace its chairman, Peter Kurer, on Wednesday, completing a boardroom housecleaning aimed at restoring confidence following a tax scandal and tens of billions of Swiss francs in losses that threatened not just UBS but also the broader Swiss banking sector.

UBS again turned to a veteran outsider to take over from Kurer, nominating Kaspar Villiger, a longtime Swiss politician and former finance minister for the post. Last Thursday, UBS stunned the close-knit banking community here when it chose Oswald Grübel, the former head of the bank’s archrival, Credit Suisse, to succeed Marcel Rohner after he spent only 20 months as chief executive.

Villiger, 68, and Grübel, 65, are lions of the Swiss establishment, and the hope is they will bring back the staid predictability that Swiss banking is known for and end a two-year period in which UBS has lurched from one crisis to another. Kurer took over as chairman only last April, but he had served in top management positions during the tax and subprime investment debacles.

Bank of England sets new policy; ECB lowers ratesChina promises spending, but it might not be newAbruptly, expatriate bankers are cut looseFor this society of 7.6 million people, the problems at UBS pose a deeper threat to the wealth engine that has made Switzerland among the world’s richest countries. Swiss financial services sector contributes 12.5 percent of its gross domestic product. That compares with 5 percent from financial services in the countries that use the euro and about 8.5 percent in the United States.

"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."

Switzerland’s small size is also a threat in an era in which banking is becoming a quasi-nationalized industry. Britain and the United States have spent hundreds of billions of dollars shoring up their banks, but Switzerland’s resources are considerably more limited. At about $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 GDP.

And while the numbered, virtually anonymous Swiss bank account is the stuff of movie legend and popular lore, pressure from Washington as well as the European Union is undermining traditional Swiss bank secrecy.

Last month, UBS paid a fine of $780 million and turned over about 300 client names to the U.S. government, 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.

On Wednesday, Switzerland was set to get another blast of unwelcome attention as a Senate panel in Washington examined how UBS helped Americans evade the reach of U.S. tax collectors.

"These abuses have been going on for much too long," Senator Carl Levin, Democrat of Michigan, said before the hearing. He has sponsored legislation that would crack down on offshore accounts.

Mark Branson, an official from UBS, says the bank will not provide the names of any more U.S. clients to the U.S. government in a fight over secrecy and tax avoidance, The Associated Press reported from Washington.

UBS already has turned over the names of about 300 U.S. clients, but the IRS wants the identities of as many as 52,000 wealthy Americans who maintain secret accounts with bank.

In testimony prepared for a Senate subcommittee, Branson writes the bank "has now done all that it can do to cooperate" with the IRS request without violating Swiss law.

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: Clients’ money is pouring from bank 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 Grübel, the new chief executive. "It created uncertainty and mistrust with clients and led to an outflow." He acknowledged 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 U.S. tax case, Grübel added, "We should never have gotten into it, and we should never do something like that in the future."

UBS shares rose 34 centimes, or 3.4 percent, to close at 10.23 francs in Zurich on Wednesday, compared with 32.68 francs at the end of April 2008. 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 by the State Secretariat for Economic Affairs. That might not sound like much compared with the 6.2 percent contraction that hit the U.S. economy during the same period, but the possibility of a steeper decline in 2009 is alarming to citizens long sheltered from 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.

Bischof, who studied at Harvard Law School, said that for Swiss voters, the biggest issue after the economy was bank secrecy and Washington’s effort to require 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 autumn, the Swiss National Bank agreed to buy $39.1 billion in tainted 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 Roth, chief executive of the Swiss Bankers Association.

"It was in a turnaround," Roth said, "and right at that moment the Department of Justice decided to force UBS to deliver the information."

Over the long term, Roth said, Switzerland will retain its position as a global wealth haven despite the pressure from the authorities in other countries and competition from even more lightly 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."

Villiger, who was expected to assume his new role as chairman in April, promised to do just that on Wednesday. "I believe these to be exceptional times for UBS and Switzerland, and I recognize the difficulties that still lie ahead," he said. "We need to respond to the current challenges by relying on our core values of integrity, hard work and reliability."