The UBS Irony

As reported in the New York Times article:

"UBS, the largest bank in Switzerland, agreed on Wednesday to divulge the names of well-heeled Americans whom the authorities suspect of using offshore accounts at the bank to evade taxes. The bank admitted conspiring to defraud the Internal Revenue Service and agreed to pay $780 million to settle a sweeping federal investigation into its activities.

In a striking admission, UBS said that from 2000 through 2007, some of its private bankers and managers had ‘participated in a scheme to defraud the United States’ and the I.R.S. by helping American clients set up and conceal offshore accounts. The scheme involved falsifying or not properly obtaining or filing certain tax forms required of both the bank and its clients."

Bad news seems to be swarming the Swiss-based bank giant incessantly ever since the U.S. sub-prime mortgage debt market imploded last year: reports of staggering financial losses and endless job cuts, the bank’s accepting prodigious government bailout money, critics’ scathing attack on the bank’s paying out Sfr. 2 billion in bonuses to staff despite accepting bailout by the state, a senior executive being named a fugitive by the U.S. authorities, and now, this disgraceful last-minute settlement over alleged tax evasion with U.S. prosecutors just to avert the disaster of being indicted.

In sum total, it seems that this once prestigious bank has been swimming in a pool of self-induced controversies that have mostly resulted from poor risk management and lax internal control in its blind pursuit of profits. One might say that UBS is no different from its scandalous U.S. counterparts like Bear Stearns, Lehman Brothers, Citigroup, Merrill Lynch, AIG etc. in terms of over-compensation to executives and wanton greed on the part of risk-taking CEOs and senior managers. What makes it slightly different from them though is perhaps the fact that it used to be a bastion of honor, trustworthiness and client confidentiality both in Switzerland and in the world, at least so far as the world’s wealthiest are concerned. After all, the Swiss have always been of a class and breed apart from everybody else in the world.

UBS’ history dates back as far as 1854 and its predecessors witnessed the earliest growth of Switzerland’s industry and trade. Its former entity, Swiss Bank Corporation, helped the Swiss government to buy back the country’s major railways from foreigners in the 1900s. The bank weathered two world wars and in the 1970s expanded its business into North America, Hong Kong, London and Luxembourg, while participating in a major restructuring of the renowned Swiss watchmaking industry.

Swiss Bank Corporation’s first major departure from conservatism that marked most of its history was in 1992, when it purchased a Chicago-based options trading company. It seems from that point on, the bank started to wade deeper and deeper into the risk-taking world. In 1998, Swiss Bank Corporation merged with Union Bank of Switzerland to form the present UBS AG.

With such a glorious steeped-in-history background and highly respectable corporate culture, it is indeed an irony that UBS should be reduced to its current pitiful state.

Perhaps what the UBS chairman Peter Kurer said is right: that banks that did not transform their business model and abandon their current compensation structures would not survive. What he failed to mention but which is none the less important is that transparency in banking practices is now the order of the day, as opposed to the Swiss bank’s long tradition of banking secrecy. Helping the wealthy to evade tax cannot by any account be considered an honorable thing to do, at least not for countries like the U.S. and Germany. Client confidentiality itself is not egregious, but misusing it as a cover for conniving with the rich to defraud a government is a totally different matter.

It is apparent that part of what plagues the world financial system is the way banks and financial institutions compensate (or rather, over-compensate) their staff, especially CEOs and senior managers. The system of linking variable compensation (i.e. bonuses) to short-term gains made from taking excessive risks has shaken the world financial system to the core. Such a system is the disincentive, if not antithesis, to sound corporate governance based on good judgment and ethics.

For UBS, it may be a rude awakening that, on top of having to deal with its flawed risk and corporate management, it needs to seriously contemplate whether its traditional banking secrecy practices, which have long been its trump card, may be a bit antiquated in the 21st century and may not be conducive to management accountability, to say the least.