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Latest UBS Stumble : Sued By The US Government

February 20th, 2009
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ubs

Less than a year ago Swiss banking giant UBS was considered by many the best bank in the world, certainly for its wealth management which was also the largest at the time, and its image and reputation were top notch amongst private clients as well as institutional and government entities.

Not so these days : Their combined losses in 2008 and beg 2009 have shaken the financial community and left many of their clients and investors much worse off than when they started out with the bank and their shares have been in a free fall from its peak around US$ 60+ to now around US$ 10.

Now the bank finds itself in the wrong kind of spotlight again now having been sued by none other than the US Government who wants the bank to immediately hand over the names and full details of all their US clients, estimated around 52,000, who allegedly hid their secret Swiss accounts from U.S. tax authorities.

Bloomberg reports :

U.S. customers had 32,940 secret accounts containing cash and 20,877 accounts holding securities, according to the Justice Department lawsuit filed today in federal court in Miami. U.S. customers failed to report and pay U.S. taxes on income earned in those accounts, which held about $14.8 billion in assets during the middle of this decade, according to the court filing.

“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” John A. DiCicco, acting assistant attorney general in the Justice Department’s tax division, said in a statement.

UBS does not intend, however, to just roll over and provide the IRS with these details according to the article :

UBS said in a statement that it expected today’s filing.

“UBS believes it has substantial defenses” to the U.S. attempt to enforce the summonses and will “vigorously contest” the case, the bank said in the statement. The bank’s objections are based on U.S. laws, Swiss financial privacy laws, and a 2001 agreement between UBS and the IRS, according to the statement.

The article goes on to quote a professor for saying that this could indeed mean the end of the famed and heavily guarded Swiss banking secrecy for which Switzerland is so well-known, at least in certain parts of the world including the EU and the US :

Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group Inc. partner, said a UBS loss in the case would be “very bad news” for Swiss banks.

Swiss Secrecy

“If you get to the point where you’re able to get information on 52,000 accounts just because they exist, not because of evidence of a crime, you’ve gotten rid of Swiss banking secrecy forever,” Smith said. “If the European Union follows suit, it’ll virtually be the end of secret accounts in Switzerland.”

The Washington Post puts another interesting angle on the story by including the former UBS banker, Bradley Birkenfeld, into the case :

The U.S. government has been probing UBS with help from sources such as a former UBS banker, Bradley Birkenfeld, who last year pleaded guilty to helping a California real estate mogul evade millions of dollars of taxes. Birkenfeld told investigators that UBS personnel went to elaborate lengths to help U.S. clients stash money in secret Swiss accounts.

 The investigation led to the indictment in November of a top UBS executive. The U.S. government has used internal bank documents to accuse UBS management of conspiring to deprive the U.S. Treasury of tax revenue.

In Wednesday’s settlement, UBS admitted that it schemed to defraud the United States, in some cases by helping clients set up offshore companies to hide the true ownership of their Swiss accounts. The operation allegedly generated hundreds of millions of dollars of profit for UBS. The government said it demanded smaller penalties from UBS than it could have in consideration of the international financial crisis.

At the moment UBS admittedly seems to have the upper hand in this unwinding case with only around 300 names and clients having so far been surrendered to the IRS and with UBS arguing a very strong case against the US law suit reference its Swiss banking laws, but as The Washington Post article concludes that this in itself may mean the biggest blow to Swiss banking secrecy ever and hence its image to world-wide clients who will wonder who is next in line :

By targeting information based in the United States, the IRS obtained the names of about 323 clients who held UBS accounts in both the United States and Switzerland and transferred money between them, IRS agent Daniel Reeves said in a separate court filing yesterday.

The greatest blow to Swiss bank secrecy thus far may be UBS’s decision to close the secret Swiss accounts of its American clients, forcing depositors to move their money and sending a message that customers can’t rely on the bank to keep their assets hidden.

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Filing For Bankruptcy - The Smartest Way To Avoid Going Bankrupt ?

December 11th, 2008
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Financial headlines are full of stories of huge corporations world-wide who are very close to or already at the level of bankruptcy, yet many of these have now discovered a last resort: filing for or threathening bankruptcy and thereby drawing the governments to the negotiation table to save the pieces.

This post looks into some of the more high-profile bankruptcy files and threats and also asks the question if this is the way forward or if indeed it is a short-term solution that will in fact leave the companies as well as the global financial markets worse off down the line.

It all started with the USD 700 billion US emergency fund package which to many large US corporations was an open invitation to ask for bail-out funds, threathening massive lay offs and foreclosures if not obliged.

MarketWatch looks into one such case with GMAC, the once-mighty financial arm of General Motors, and states:

Desperate times call for desperate measures. So when the government offered up $700 billion in emergency funds to keep money flowing through the nation’s banks, GMAC decided to tap into that cash by recasting itself as a bank holding company.
To qualify as a bank, however, GMAC needed to show the Fed it has at least $30 billion in regulated capital. So it offered its creditors a massive debt-for-equity swap.
The plan went over like a lead balloon. Fewer than 25% of GMAC’s creditors signed up for the swap when closer to 75% were needed to make its bank plan work. This means the marketplace just declared GMAC yet another subprime borrower.
The article finishes off by saying that it is, however, unlikely that GMAC will succeed in their attempt to use filing for bankruptcy as a way to resolve their financial crisis:
GMAC is fast running out of options. General Motors is itself begging the government for billions of dollars to see it through the next few months. Cerberus Capital Management, the giant private equity firm that bought 51% of GMAC from GM in 2006, is in the same boat, asking Uncle Sam for money to keep Chrysler, another of its recent albatross acquisitions, from collapsing as hordes of credit-starved consumers, struggling to meet mortgage payments, have stopped buying cars.
GMAC said Wednesday it would extend its debt-equity swap through Friday in hopes of drumming up more interest. But in this economic Big Chill, the likelihood that more investors are going to step up seems remote, at best.
With the threat of bankruptcy looming ever larger, this mess is looking increasingly like yet another case of reckless lending practices coming home to roost and sets up the next episode in the ongoing restructuring of the U.S. mortgage market.
Don Boudreaux argues in his latest article “Bankruptcy doesn’t equal Death”, that whilst he personally disagrees with the fact that should the US Government not bail out the Three Big (auto manufacturers), they will disappear altogether, he argues that the same auto industry could use the process of bankruptcy to get more competitive - if not voluntarily then by force :

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can’t use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

As it happens, I doubt that GM, Ford and Chrysler will all stop operating without a bailout. Firms that together produce close to half of all new cars and trucks sold and leased in the U.S. each year are unlikely to find the market for their products suddenly too small to justify continued operations. (And if they do, what would this development say about the quality of those firms’ products and about the efficiency of their operations?)

And he goes on to conclude that if the auto industry as it looks today isn’t meant to be then so be it:

Restructuring under Chapter 11 will oblige Detroit’s Big Three to shrink, and perhaps even to merge together or with other automakers. This will unquestionably cause hardships to some workers and suppliers, but hardships no different than those suffered routinely by workers and suppliers in other industries whenever economic change reduces consumer demands for some products.

If Washington gives no special subsidies to workers and suppliers outside of the auto industry, why treat GM, Ford and Chrysler differently? Are their workers or owners more worthy? Not at all. The jobs and good pay that they’ve enjoyed were made possible by the very economic openness that now requires significant restructuring of these three firms. Their shareholders, workers and suppliers have no moral or economic claim on special treatment from government.

Donald Trump recently argued that the survival of General Motors, Ford and Chrysler is important to the long-term health of the United States, and continued :

It would seem to be that they should Chapter 11 it and the country should put up the financing,” said Trump. “You have to save the car industry in this country. General Motors can be great again. Ford can be great again. And Chrysler could be great.”

 Dismissing arguments that bankruptcy filings would spook consumers, Trump noted that a number of other major U.S. industries have survived, and even thrived, after court-ordered reorganizations.

 ”If you look at the airlines, I mean, I’d rather buy a car than fly in an airline that is in Chapter 11,” said Trump. 

The same article from MoneyNews.com quotes President-elect Barrack Obama for supporting the auto industry bail-out, however, he emphasizes that he wants to see change within the industry for the future:

“I think that the big three U.S. automakers have made repeated strategic mistakes,” Obama told reporters.

 ”They have not managed that industry the way they should have, and I’ve been a strong critic of the auto industry’s failure to adapt to changing times — building small cars and energy efficient cars that are going to adapt to a new market.”

Walter E. Williams of The washington Times argues that just because a company files for Chapter 11 it does not mean that their assets disappear into thin blue air but would most likely be re-purchased by other entities who would re-employ these and most likely to better use too:

When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm’s resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.

And he is certainly not shy to conclude on his views on bailing out The Three Big :

How much congressional involvement do we want with the Big Three auto companies? I would say none. Congressmen and federal bureaucrats, including those at the Federal Reserve Board, don’t know any more about the automobile business than they know about the banking and financial businesses they’ve turned into a mess.

Just look at the idiotic focus of congressmen when the three auto company chief executives appeared before them. They questioned whether the executives should have driven to Congress rather than flown in on corporate jets. They focused on executive pay, which is a tiny fraction of costs compared to $73 hourly compensation to 250,000 autoworkers. The belief that Congress poses the major threat to our liberty and well-being is why the Founders gave them limited enumerated powers. To our detriment, today’s Americans have given them unlimited powers.

Finally, this link gives you access to what Bloggers have to say about the Bail-Out vs Bankruptcy issue and provides an interesting insight into the tax payers and consumers’ minds so check it out.

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