The Fed's Unappreciated Bailout of a Miscreant Swiss Bank

Saturday, March 7, 2009

NOT NORMALLY a hotbed of anti-Americanism -- or of any other political sentiment, for that matter -- Switzerland is experiencing an unusually exciting relationship with the United States right now. At issue: U.S. demands that the Swiss help root out a massive alleged conspiracy in which the Zurich-based bank UBS, Switzerland's largest, helped wealthy Americans avoid taxes through secret accounts. To stave off a potentially devastating Justice Department prosecution, UBS agreed last month to pay $780 million and name about 300 U.S. clients. But U.S. authorities have since filed a civil lawsuit seeking data on 52,000 Americans who the U.S. government says are hiding about $14.8 billion in Swiss accounts.

If U.S. authorities succeed, they will have closed a big loophole in tax enforcement. But Swiss banking secrecy could be finished -- and, with it, the competitive advantage of the Swiss banking industry. Not surprisingly, Swiss public opinion is annoyed, and the Swiss government is pushing back diplomatically -- most recently in a meeting Monday between Swiss and U.S. law enforcement officials. Some of the louder voices in Swiss politics want broader retaliation. The right-wing Swiss People's Party, for example, has said that Switzerland should refuse to take in detainees from Guantanamo Bay, Cuba, when the prison there is closed; repatriate Swiss official gold supplies stored in the United States; or kick the U.S. Interests Section out of the Swiss Embassy in Cuba.

What you don't often hear the Swiss say is that UBS might have been bankrupt today if not for a bailout from -- you guessed it -- the United States. Last fall, the bank was facing $60 billion in losses on mortgage-backed securities. The Swiss National Bank, Switzerland's central bank, agreed to take the toxic assets off UBS's hands. To do that, however, the SNB needed $54 billion -- which it got from the Federal Reserve in exchange for an equivalent amount of Swiss francs. This "currency swap" between the two central banks amounted to more than 10 percent of Swiss GDP.

One of several such swaps between the Fed and its counterparts around the world, the Fed-SNB deal was conceived separately from the tax investigation, we are told. The Fed believed that the swap was in the interest of the United States, since a UBS meltdown might have exacerbated the global financial crisis. As U.S.-Swiss tensions have grown, the Swiss central bank has decided to take only about two-thirds of the original $54 billion and has begun displacing the remaining Fed cash by selling dollar-denominated bonds in Europe. For now, though, UBS and the Swiss government remain dependent on the Fed's willingness to renew the currency swap periodically.

In short, all things considered, Uncle Sam has been a pretty good sport about UBS. The denunciations of U.S. policy in Switzerland simply show that no good deed goes unpunished. Well, retaliation can be a two-way street. The Obama administration hasn't used the Fed's lifeline as leverage on the tax issue, and no doubt there are good and high-minded reasons not to do so. Still, as bilateral negotiations proceed, it might be worth a quiet mention or two.

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