Wow. Our experiment is off to a great start—let's see if we can finish it off sooner than expected.
On Friday I explained why UBS was the only bank that offered to take a hit on its contracts with AIG during the government's backdoor bailout of the ailing insurer. The reason? A looming US investigation of UBS that meant the Swiss banking behemoth was in no position to play hardball. In an interview this weekend, one of Switzerland's justice ministers revealed the extent to which the fate of UBS—and the entire Swiss economy—is again in the hands of the American government.
As Mother Jones reported in November 2008, UBS helped wealthy Americans hide billions of dollars from the Internal Revenue Service (IRS) in violation of a 2001 agreement signed by the bank promising to identify and document customers with any US sources of income. The agreement was a major departure from historic Swiss banking secrecy laws—one which Swiss courts recently deemed to be illegal. The high court's decision could also prevent UBS from fulfilling its plea deal with the US government, in which it promised to provide more names of US customers with illegal accounts. If UBS fails to live up to its side of the agreement, the bank could face the revocation of its license to operate in America. Now, Swiss Justice Minister Eveline Widmer-Schlumpf warns, "the Swiss economy and the job market would suffer on a major scale should UBS fail as a result of its license being revoked in the United States."
If there ever was a bank that's too big to fail, it's UBS. It is the biggest bank in Switzerland and—before massive subprime mortgage write-downs and the attention of the IRS scared many of its wealthy customers away—it was the largest provider of high-net worth private banking services in the world. (In an ironic twist, Bank of America has since taken its wealth management crown.) UBS and its chief domestic competitor, Credit Suisse, are six times larger than Switzerland's entire economy—an imbalance reminiscent of the failed banks that decimated the economy and currency of Iceland. Last year the $2 trillion balance sheet of UBS alone was roughly four times the size of the total Swiss output. As Investment International magazine observed at that time, "a UBS 'blow up' would be catastrophic to Switzerland’s financial stability."