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DOJ's Latest "Beat Down" on Swiss Banks

Bruce Krasting's picture




 

DOJ's Latest "Beat Down" on Swiss Banks

Courtesy of Bruce Krasting

 

 

Wow! The Department of Justice took an extraordinary step yesterday. It indicted Swiss private bank, Bank Wegelin, for aiding and abetting in US income tax fraud. 

This is a big deal. 


I’ll try to keep this fascinating story brief.

Bank Wegelin (W) has been around for 270 years. In Switzerland, it is referred to as a “Private Bank”. There are dozens of Private Banks in the country (less every week). 

 

 

Private Banks do private things and charge big fees. Up until four years ago, the Swiss Private Banks were doing private things for private clients from all over the world, including many US names.

The DOJ sued the big Swiss bank, UBS, over this private business. UBS folded when the DOJ threatened a criminal complaint. (UBS would have had to close all its US businesses had a criminal complaint prevailed.) It ended up costing the bank $780 large and, for the most part, the DOJ got the “names” it was after.

Having blown UBS to smithereens, the DOJ set its sights on the other Swiss Banks. It targeted eleven Private Banks. W was on the list.

Talk of a settlement, including big buck fines and the release of more "names", has been in the press for a few months. Treasury Secretary Geithner met with Eveline Widmere-Schlumpf (Swiss Finance Minister) in Davos last week. It seemed like progress was being made on the thorny problem of the private banks:  

 

 

 

Widmere-Schlumpf:

“We’re hoping that we’ll reach an agreement with the U.S. within the next couple of months”

 

 

I was surprised when the non-USA assets of W were “sold” to Notenstein Private Bank on January 27. Notenstein is 100% owned by Raiffeisen Bank (R). This sale should have been a tip off that the conversation between Geithner and Widmere-Schlumpf was not as friendly and optimistic as the public comments suggested.

 

The Senior Managing Partner of W, Konrad Hummler (KH), commented on the sale of his bank: (Apparently he was surprised too)

 

 

 

I never could have imagined that we, as owners of Switzerland’s oldest bank, would have ever considered selling”

KH was clear that the sale was a reaction to the pending DOJ hammer blow:

“The extraordinarily difficult situation and threat to the bank brought about by the legal dispute with the US”.

With the non-US assets stripped out of W, the DOJ suit is functionally against a dead person.

Note: Wegelin had no physical assets in the USA. It did have a bank account in the US holding $16.2mm. That was seized yesterday. But that amount is peanuts. The DOJ wants much, much more.

There's an unusual part to this which I find curious. W had an ‘old school’ way of doing business. To give assurances to its private customers that the bank was solid, and their money was safe, the Board of Directors of W assumed personal liability for the affairs of the bank.

No one has lost a Franc in the account transfers from W to R, so it would appear that those directors are now free from any liability. However, the DOJ has named EXECUTIVE X as a plaintiff in the charges files yesterday. So it would appear that Konrad Hummler’s (KH) problems are not over.

It just so happens that KH is also the Chairman of the Neue Zuricher Zeitung (NZZ), an influential Swiss rag. KH has a long history in Swiss banking. He used to run Swiss Bank Corp., which he later sold to UBS. He was the former head of the Swiss Private Bankers Association. He was an adviser to the Swiss National Bank for seven years!  (He lost that job in April, 2011 as the DOJ noose was getting tighter.) This guy is wired.

The DOJ might also pursue the former assets of W. This could be problematic. The timing (and the surprise) of the sale of W's non-US assets to Raiffeisen Bank (R) might have pissed off the folks at the DOJ. There are (unconfirmed) reports in the Swiss press that the sale price for W's non-US assets was CHF 700mm ($725mm). That might explain the actions DOJ took. That’s a lot of loot.

Will the DOJ go after R? This would seem unlikely. R has a very big presence in Switzerland. It is a retail bank with three million customers and branches all over. It is affiliated with Raiffeisen Bank International (RI).  RI is a very big bank in Eastern Europe with 13mm customers . Of further interest is that both R and RI are part of Unico Banking Group. 

 

 

 

This consortium includes the big Dutch bank, Rabo and also the French bank, Credit Agricole. Maybe I’m nuts, but I don’t see the DOJ messing with a hornets' nest this size.

I think the DOJ's steps yesterday were just “shock and awe”. This puts more pressure on the remaining Private Banks. The DOJ blew up W in a rather spectacular fashion. Other Swiss bankers in the DOJ's cross-hairs must be crapping in their pants. Many of them are gathering up client dossiers - and getting ready to write big checks.

The DOJ is like a Rhinoceros. It's not very good looking, and when it puts its head down and charges into the brush, it tramples anything in its way. Nothing can stop it.

This matter will come to a head pretty soon. If it doesn’t, the DOJ will knock off the next Private Bank on the list. 

Fines will get paid. Names will be turned over. Some individuals will be prosecuted. The “names” have some explaining to do. At the top of this list is the good old IRS. Other interested parties will include creditors, wives, ex-wives, ex-wives’-lawyers, current-wives’-lawyers, business partners, employers, the press, relatives and friends.

After a while, this will all be forgotten. Sort of. The door for Americans to hide money away from the IRS is closed. Sort of. The foreign banks won’t want American customers; it’s too much of a hassle. If you do find a Banca di..... outside of the USA, you will have to plunk down a SS card, and agree to have info given to the IRS. 

The door is closed for all electronic money. But the door is not completely closed. This story is as old as the Egyptians. Folks have been cheating their partners, wives and the taxman forever. It’s not likely to stop. 

I understand that cash boxes are filling up with bills in some locations. In a zero interest rate environment, that makes some sense. Sort of. It makes infinite sense if rhinos are around. 

On second thought, this episode will not be forgotten. Many people have already been trampled. More are in harm's way. Such is life. It has left a scar on the US image in some of the financial centers. The US played hardball and won. You don’t win many friends playing hardball. But this had nothing to do with friends. (Switzerland was once a friend of the USA.) It was always about the money.

There are many pieces of this story that would make for a good movie. For the life of me, I can’t figure out who are the good guys. Maybe that's the point.

.
Note: Tyler Durden sent me a note with a link to a ZH piece from 2009.
This is a rant by Konrad Hummler, the "Boss" at Wegelin. ZH was three years ahead of the curve on this one.
 

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Sat, 02/04/2012 - 12:37 | 2126506 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

And I don't love hos.

Sat, 02/04/2012 - 14:03 | 2126709 Kayman
Kayman's picture

Mr Lennon Hendrix

Short term rental vs. Conditional Sales Contract.

Sat, 02/04/2012 - 11:13 | 2126388 Richard Chesler
Richard Chesler's picture

We'll get those contributions one way or another.

XOXO,

Barry.

 

Fri, 02/03/2012 - 18:25 | 2125044 Almost Solvent
Almost Solvent's picture

At some point all IRS returns (corporate & individual) will require a fiscal year's worth of bank statements, CC statements, etc. to be attached as a schedule.

 

Not that I agree, but easy step to start assessing taxes on "off the book" transactions, but then again that would just further drive those transactions to cash and other untraceable transactions.

Sat, 02/04/2012 - 08:07 | 2126236 Freegolder
Freegolder's picture

'It ended up costing the bank $780 large'

 

These days, I assume that'll be trillion then?

Sat, 02/04/2012 - 19:01 | 2126427 Bruce Krasting
Bruce Krasting's picture

Sorry. I talk like that. I should not write like that.

The description of "large" has many meanings. I've always heard/used it in Wall Street talk. I'm old, in my day, Large meant millions.

Today, Large means billions.

To be clear, UBS paid a fine of $780 million. That's pretty large to me.

It's interesting that the description of "Large" has added three zeros in the last 20 years.

I would say, "Gimme a price on USDYEN for 500 large"

Today, "Gimme a price on USDYEN for 2 large".

Surreal.

 

Fri, 02/03/2012 - 22:31 | 2125753 BidnessMan
BidnessMan's picture

Won't want to see it happen, but paper currency is likely going away soon.  48M now have SNAP debit cards - so poor people are covered.  And most retailers now take the SNAP debit card.  Electronic payments only soon.  Demise of the true barbarous relic - paper currency.  Hard to have a Bank Run and Bank Robberies if there is no paper currency to get out of the bank.  Bankers will like it - most of their infrastructure and staff cost revolves around accepting cash, counting cash, protecting cash, and transporting cash - thick glass teller cages, big expensive safes, ATM machines, security guards, armored cars.  Who needs branches and ATM machines if all paper currency goes away?  Paper currency - the life blood of the Shadow Economy and the Vice industries.  Plus half of all US currency is outside the US, so what better way to stiff those non-US residents than to call in all US currency on a deadline.  After x date paper currency really is worthless.  We'll just charge up your SNAP card with your last paper currency deposit.  

Pretty frightening implications.  Untraceable transactions is the main reason why paper currency will soon go away.

Mon, 02/06/2012 - 06:38 | 2130024 Urban Redneck
Urban Redneck's picture

"THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE" when that comes off the otherwise worthless fiat- the USD won't even make the top 3 currencies for international transaction settlement, which is why Treasury is constantly seeking to increase its influence over foreign banks.  

Sat, 02/04/2012 - 23:59 | 2127857 honestann
honestann's picture

As long as you can buy physical gold or any other physical goods with your debit card, it quite easy to execute a massive or even total "bank run".

Sat, 02/04/2012 - 12:32 | 2126494 DavidC
DavidC's picture

BitCoin?

DavidC

Fri, 02/03/2012 - 19:58 | 2125376 CrazyCooter
CrazyCooter's picture

The link to the 2009 article didnt work for me ... but I was able to google it up ...

http://www.zerohedge.com/article/farewell-america-switzerland

Regards,

Cooter

Sat, 02/04/2012 - 09:19 | 2126296 French Frog
French Frog's picture

"ZH was three years ahead of the curve on this one."

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