Tuesday, February 24, 2009

UBS Tax Fugitives Doomed To Public Exposure

UBS recently threatened it would sue the US to prevent the IRS from getting access to its precious anonymous account logs, claiming the publication of these names would spell the end for its business model as the historical "nameless" Swiss account concept would be over. Unfortunately for UBS, it likely has no option but to comply with the US' demands. Why? If you will recall on September 18 2008, (the day made famous by Paul Kanjorski who either had dementia or was relatively correct), the Fed authorized a $180 billion expansion of swap lines with every major country: the main recipients were the ECB, the Bank of Japan, the Bank of England, the Bank of Canada... and the Swiss National Bank. The Swap line which was originally $27 billion was increased to $30 billion 10 days later, and double that amount to $60 billion a few days later... Following the chronology of events we notice that two weeks later, on October 16, the Swiss National Bank realized that it needed to bail UBS out or else its bank system would collapse (the first off-balance sheet bad bank model, in many ways this is the choice that the Fed has been avoiding for months with Citi and BofA). Prudently, the Swiss National Bank had set up the Fed swap lines just a mere 10 days earlier, without which UBS and likely Switzerland would implode. And these swap lines amounted curiously to just the amount needed to bail out UBS... Coincidence?

Some of the less mainstream thinking goes that the Fed had provided the swap lines with the proviso that it would "collect" down the line. Brad Setser pointed out one non-altruistic aspect of this transaction:
There is another key difference between European banks’ need for dollars and many emerging markets’ need for dollars. European banks need dollars to finance their holdings of US mortgages and other US securities. If they didn’t have access to dollar financing, they would either have to borrow euros and buy dollars – pushing the dollar up (and hurting US exporters) or they would have to dump their US assets (hurting US banks holding similar assets). By lending to European central banks who then lent to their own banks, the US kept some European banks from being forced sellers of risky US assets – and in the process putting pressure on US banks. The US wasn’t acting entirely altruistically.

There is more. In many ways by providing over $500 billion of what was seen as virtually interest-free rescue financing to global central banks, the Fed was implicitly holding each and every country hostage. As the domestic economies of the ECB, UK and Swiss Bank are in no danger of repaying these swaps any time soon (let along the less stable central banks that opened swap lines with the Fed), the Fed, the conspiracy minded among us may say, has control over extensive levels of policy decision making at foreign countries, by dangling the threat of swap line removal. Granted, game theorists will say it only accentuates the M.A.D. nature of the September 18th world, but the significant leverage potential of threatening to pull even some of the cash from any one sovereign, especially in today's terrified environment, is a substantial factor that must be objectively considered. And the chronology of events regarding the escalation of hostilities between the IRS and UBS is merely the stage for the Fed's saying "time to collect" to the SNB. After all, UBS would not exist without the US' assistance in the first place.

What the US is collecting is the interest payment of populist anger at the ultra-rich. Whether it results in the implosion of UBS is unclear: the Fed has likely done its homework and realizes that with UBS' bad assets already offloaded to the SNB, the systemic threat of its destruction is marginal at best. In the meantime, the opportunity cost is collecting extensive political brownie points at the expense of a few unhappy Swiss depositors. Sphere: Related Content
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DINKs said...

Great posting. The only thing is that wouldn't the swiss have enough money to bailout their own banks.

Tyler Durden said...

not without raising more capital, and the CHF is not the USD - you can't inflate your way out of a money hole there.

Anonymous said...

Read somewhere that Swiss banks' balamce sheets are (were) much larger than Switzerland's GDP.

Anonymous said...


Anonymous said...

I think the CHF is more endangered than the PLN where I live. But I wouldn't borrow CHF to buy a house though.

If some currency should go under, do you think the CHF would be allowed/chosen to be the "Lehmanese" currency. The systemic risk is thought to be low, isn't it ?