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Between the billions of dollars lost in valuations and the thousands of investors who simply said goodbye to the markets since September last year, nobody is quite sure how much of estimated $7 trillion of privately-held “offshore” wealth still rests in Switzerland. But Swiss banking insiders concede that their country’s claim to controlling 30% of the world’s “hot” money is certainly subject to debate.

And, any further deterioration in Switzerland’s status as a pre-eminent safe haven could seriously impair the profitability outlook for Union Bank of Switzerland (NYSE:UBS), Credit Suisse (NYSE:CS) and a number of elite private banks in Zurich, Geneva and Lugano.

At the peak of election season in March, the leader of India’s opposition Bharatiya Janata Party claimed that Indians had illegally stashed away US$6-9 billion in Swiss banks. “If voted to power, we will make every attempt to bring that money back for national development purposes,” declared Lal Kishen Advani at a huge public rally on the outskirts of Mumbai. Though Mr. Advani’s alliance lost the elections, the government is under considerable pressure to chase down the billions of dollars of Indian-origin assets lying in Swiss accounts, mainly in accounts at Union Bank of Switzerland and Credit Suisse but also in Swiss branches of U.S. and European banks.

Of late, the Communist Part of India (Marxist), emboldened by the UBS disclosure agreement with Washington, has also called for action against Swiss banks who fail to disclose Indian-origin deposits. In an unprecedented blow to Swiss banking secrecy laws in late August, UBS agreed to identify 4,450 U.S. clients sought by the IRS for allegedly hiding assets to avoid tax penalties. Around the same period, French authorities, citing a new tax treaty with Switzerland, claimed to have received information on Swiss bank accounts worth $3 billion. “It’s probably all to do with tax cheating, though some of the money may have mafia-related links,” said the French budget director.

UBS and CS shares hit record lows shortly after the UBS-IRS settlement was announced. In recent weeks, however, both shares (CS in particular) have recorded impressive gains. Will the increasing demand by governments across the world for the Swiss to compromise on their traditional secrecy regulations result in a further shrinkage of the wealth management business of Swiss banks? If so, do current price levels ($18-plus for UBS and $56-plus for CS) represent safe shorts in a climate where, apart from international law enforcement momentum, a market downturn could result in huge capital outflows from Swiss banks?

Swiss law distinguishes between tax evasion and tax fraud; privacy may only be lifted with respect to the latter. But governments in many countries are now taking the view that the distinction between evasion and active deception is untenable, and that it should not be left to Swiss authorities to interpret the laws of other sovereign nations. “If one analyzes the direction international cooperation in criminal matters is taking, we can assume that the reasons to maintain banking privacy will gradually diminish,” a senior partner of a Basel law firm told this writer over the weekend. “All it takes is for one Swiss prosecutor to state that the principles of comity in international relations reign supreme, and there will be panic in Swiss bank boardrooms.”

A historical study of the financial statements of UBS and CS reveals that the quantum of private wealth in their asset management portfolios has a directly impact upon fees, and trading and underwriting income.

This writer is of the opinion that, given (a) the drastic adjustments made in their balance sheets during the first half of this year, (b) the excellent private banking infrastructure Switzerland still offers to this day and (c) the unique position Swiss banks enjoy in the national economy, both UBS and CS will continue to draw buying interest for the present.

More so, given the general view that the legal initiatives by foreign governments have not reached anywhere close to the intensity required for a concerted, frontal attack on a banking law codified by parliament in 1934. “Developing countries need to address the plague of corruption before they can stop people from parking assets in Switzerland,” said the chief of a special tax collection cell in New Delhi. “Something also needs to done about the havala system which enables record-less cash transfers across international borders within minutes.” (American readers will recall the FBI’s references to the havala, or hundi, system in the weeks following 9/11).

Therefore, though this writer sees no real upside from yesterday’s closing prices, there is no merit in short positions based on fears of large-scale capital flight in the near or medium term. Stand aside on UBS and CS.

Disclosure: no positions