UBS vs. the IRS and DoJ: It's Getting Worse

Includes: CS, UBS
by: Bruce Krasting

This may be a high stakes week in the drama of UBS vs. the US IRS. There was talk this weekend that the Justice Department is soon to make arrests, arraignments and ‘perp walks’. If that is to be the case, you must read this as just another visible effort by the DoJ to shake UBS’ tree. If this does take place this week it confirms that the DoJ is moving ahead without consideration of the fact that the global financial system is currently very vulnerable.

Making matters worse are some recent comments from a number of the Wharton School's professors:

"Swiss banking as we have known it is dead," says Wharton professor of operations and information management Maurice Schweitzer.

That is pretty strong language from Professor Schweitzer. Even more troubling:

Philip M. Nichols, Wharton professor of legal studies and business ethics acknowledges that the lack of transparency and accountability invites abuse. "When I talk with people involved in corruption all around the world, the phrase 'Swiss bank account' almost always comes up."

This is not so good news for Swiss Finance Minster Merz. Possibly he is attempting to strangle Professor Nichols in this picture.

I am not sure why the Wharton School has UBS in it’s sights but it just gets better and better, or possible it just gets worse and worse:

"UBS management was really tone-deaf in terms of U.S. tax policy," says Wharton finance professor Richard Marston. "The one thing that distinguishes investors in the U.S. from many European countries is the concern that they don't violate tax laws. It's taken seriously by the IRS, and everyone clearly knows this."

If professor Marston is suggesting that other countries whose citizens have black accounts in Switzerland do not care about lost tax revenue, he is just dead wrong. The European press is reporting on efforts to pursue their country's tax cheats on a regular basis. You can be sure the tax authorities in the UK, France and Germany are just letting the US IRS do their work for them. When the US side of this is resolved the rest of the world will line up for the names of their citizens. In a year where tax revenues are light this seems like an obvious place to go for $30-40 billion.

Professor Nichols went on to comment, "There are still plenty of countries in the world that are somewhat authoritarian, in which the government basically takes money from the rich and keeps it to themselves. To wealthy persons, [secret accounts] are an invaluable tool for legitimate purposes." But for those government or NGO (non-governmental organization) officials who are trying to aggregate and mobilize capital for development purposes in emerging economies, "they are somewhat frustrating because we wish the capital would stay in the home country."

This type of thinking is going to keep the pressure on the Swiss banking industry for a very long time. This is the Wharton School that is doing this talking, after all.

Possibly the most troubling comments are from Wharton finance professor Marshall Blume who said:

"Certainly people who have ill-gotten gains find it attractive to hide them there. For the U.S., it's tax evasion, but for other countries it's more a place to hide money."

This comment is the crux of the matter and the issue that is most daunting to the Swiss Private Banking Industry. The words, ‘ill gotten gains’ or ‘forbidden fruit’ are coming into this debate at an ever-increasing rate. If this coming week’s Perp Walk of the first 250 names results in an accusation that some of the money that is in these accounts is in fact, “tainted” that will change the entire direction and out come of this story.

The IRS and the Justice Department are doing their best to bust up UBS. As of today the American people could care less. Secretly a lot of them are wishing they too had an account that hid income from the taxman. However if the debate is shifted to ‘hiding ill gotten gains’ versus ‘I cheated on my taxes’, the sentiment in the press and in the public will turn against the Swiss very quickly.

If those perp walks do happen this week it is going to be very tough on all of those folks working on the Bahnhofstrasse. This is especially true for UBS’s new Chairman Kaspar Villiger and CEO Oswald Grubel.