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DK MAktai, Zurich, enviamos uma carta sobre Der Untergang -- The Downfall -- Switzerland






Remember the old banking slogan, "Any port in a storm, Switzerland in a hurricane!" Well no more, and the slogan needs replacing. We at ATCA never understood that phrase in its entirety because Switzerland is landlocked and not subject to hurricanes. However, its social and geographical insularity may be part of the problem in this age of dynamic risk allocation and shaky banks.


Switzerland's proud banking nation was forced this week to provide a 6 billion Swiss franc equity injection into its largest bank, UBS, along with the separation into a distinct entity of some 60 billion Swiss francs in toxic loans from the bank by way of a lifeline. UBS has posted bigger losses than any European bank from the credit crisis. What does this mean precisely when the other European banks in need of recapitalisation have received the finance in exactly the opposite way. Take the example of what the British prime minister Gordon Brown did. The state took shares in the ailing British banks. So of course the state took on risks but also the taxpayers have a share in later gains. Most Europeans and later the United States have gone along British lines. The Swiss authorities are doing exactly the opposite in that they are spending nine-tenths of their intervention on buying toxic securities and one tenth on convertible bonds which offer a chance of later gains. !
That is
a purely bank orientated solution and may not in the interests of the state's finances.


Switzerland has paid USD 54 billion -- SFr 60+ billion -- for UBS securities that are now unsellable, which is a risky proposition. The Swiss cabinet is playing down the risk, presenting the situation as if this support action could be a good deal for the country. However, by taking on the securities through the Swiss National Bank, the state will only benefit from a small portion of the securities, which may appreciate in value. With the very bad, toxic securities, the losses could be irretrievable. The worst securities now stand at between 9 and 15 per cent of their original value and are still falling. Even if these doubled or tripled in value, it would not bring us near the price paid. This loss will of course would be shouldered by the Swiss National Bank and inter-alia the Swiss nation. Further, UBS does not have to take responsibility for the losses coming from the hived off toxic securities. This risk is now carried by the Swiss National Bank. UBS has now agreed !
on a
division of profit with the SNB, should there be a profit. But if this business ultimately ends in loss, the SNB will pay nine tenths of that from the public purse. Despite all the cabinet's protestations, this works according to the following system: profits stay private and the state pays the losses.


This brings us to the nub of the problem. Analysts noted that UBS has continued to suffer massive capital outflows as clients withdrew SFr 80+ billion during the past quarter, indicating a further loss of confidence in the Swiss bank. UBS and the country's second-largest bank, Credit Suisse, account for around two thirds of the USD 3+ trillion on Swiss banks' balance sheets. They employ almost half of the 110,000 people who work for banks in the country of 7.5 million. Switzerland is too small to sustain such enormous bank wobbles and provide security. This crisis shows that there is effectively a state guarantee in place for the two largest financial entities as well as the others. The state cannot allow either of the big two to fall. These large banks however, are too large for Switzerland alone to be able to save them in the midst of a financial hurricane of category five. If there were higher capital reserves provisions for the two largest banks years ago, this fire!
could
have been prevented. The current provisions for the banks, known as "Basel II", appear not to have worked. They have not proven reliable and therefore ought to be changed. The biggest insecurity in the system is that the banks assess their own risks. This opened the door to manipulation. UBS is a case in point. Before the beginning of the crisis, it calculated its credit risk at SFr 800 million. Now it has had to write down SFr 40 billion - that's 50 times more. In other words, this risk measure is wide open to manipulation. Having sufficient capital resources is the only buffer that works in a crisis. Otherwise the state has to step in.


Understandably, Switzerland has reacted angrily against former top managers of Swiss banking giant UBS, calling on them to return their bonuses, after the bank had to be rescued by the state from the credit crisis. "Mr Ospel, pay back your bonus! Now! Immediately!" screamed the front page of tabloid Blick, referring to former UBS chairman Marcel Ospel. Mr Ospel was forced to resign earlier this year, handing over his job to Peter Kurer, after the bank incurred billions in damages due to the US subprime mortgage crisis. In an interview with Swiss weekly magazine Bilanz earlier this year, Swiss president Pascal Couchepin said: "I'm outraged that Marcel Ospel has earned Pharaoh-like salaries for four to five years and that when the bank wobbles, he can keep it all." The centre-right Swiss political party FDP also called on former UBS managers to return their bonuses. "To be liberal means no free pass for irresponsible leadership of companies. The previous leadership of UBS!
had
collapsed. We demand that they at least pay back the bonuses they had received in the past years," the party said in a statement.


In the midst of all this, here is the Quadrillion dollar ATCA question, "Is Switzerland still the place to park Rolls-Royce capital in the middle of a global meltdown?" Watch the Swiss Franc.