The Financial Times gives prominent play to a story that I suspect will go largely unnoticed in the US, that of the way that the Switzerland’s bank regulator, the Swiss National Bank, has forced its two biggest banks, UBS and Credit Suisse, to shed risk in a serious way and shrink.
It took a while for the central bank to impose conditions, but the proximate cause was the bailout of UBS during the crisis. As we discussed in ECONNED, UBS went full bore into bonus gaming, not only keeping its own AAA CDO tranches, but also buying them from other banks, then partially hedging them with credit default swaps. That created very large and easy “profits” for the traders. And as we know, that scheme blew up spectacularly.
The Swiss National Bank, unlike any other sugar daddy rescuing reckless banksters, forced UBS to hire independent parties to interview staff and prepare a report explaining in gory detail how the bank blew itself up. Most of this information was made public. Had every other banking regulator followed suit with their wayward charges, it would have provided a vastly better foundation for discussions of regulatory reforms and would have led to much more focused investigations.
The SNB earlier this year had taken the unprecedented step of imposing a 19% capital requirements, which is in line with the recommendations of some academics, like Amat
Admati. This was the outline of the plan, per Eurointelligence:
According to a draft law those two institutions should be required to keep 19% of their capital as a cushion of which 10% has to be core tier one capital. Part of those 19% is a surcharge on big banks of 6% which can be covered by contingent capital (cocos). That measure alone will cost both banks €18bn respectively, the paper claims. The government justified its proposal by saying that nowhere else banks had a comparable weight in the economy as in Switzerland.
Why are the Swiss being so bloody minded? Having two big banks who have not conducted themselves very responsibly when their assets together are 500% of your GDP does tend to focus the mind.
We indicated at the time that the options for these banks were limited:
Now this would seem to put paid the idea that governments need to roll over and play dead when big banks bark. While the heads of some boutiques within firms may be able to bolt, like hedgies and private equity types, anyone too close to the capital market engine is going to be less mobile. You need a credible central bank to back you up (and Japan and China are not about to welcome foreign entrants, thank you very much) and you also need to be close to clients (financial centers have big network effects). You could in theory split the traders off from client facing staff but in practice there is a reason salesmen and traders typically sit in close physical proximity: the information advantages run both ways.
Indeed. UBS apparently looked into splitting off and redomiciling its investment bank; that plan apparently was either operationally unworkable (as in the new entity could not fund itself at competitive rates) and/or no country with a credible central bank would agree to the headquarters change (note that under the prevailing “home-host” rule, even though financial firm are licensed on a national basis and required to obey local bank regulation, the regulator in the home country supervises bank solvency and is also expected to take charge in the event of distress or insolvency).
The Financial Times tells us the outcome:
UBS has outlined long-awaited plans to shrink its business dramatically and refocus on its core wealth management operations, making deep cuts to its investment bank.
The Swiss banking group plans to cut more of its investment bank staff and slash its risk-weighted assets in its investment bank almost by half over the next five years…The changes will involve streamlining the investment bank to strip out about SFr145bn ($158bn) of assets weighted by risk from the current SFr300bn total, with the bank exiting business like asset securitisation and complex structured products.
That should help to boost the group’s return on equity to between 12 per cent and 17 per cent – well down on pre-crisis goals but still ambitious in the current much tougher trading and regulatory conditions. In the first nine months of this year, UBS achieved an annualised ROE of 10.7 per cent.
“The investment bank will be less complex, carry fewer risk weighted assets and require substantially less capital to produce sustainable returns for shareholders,” said the bank….Rival Credit Suisse this month announced plans to shrink risk-weighted assets in the most capital intensive parts of its investment bank by about half by 2014.
The changes being forced on the two biggest Swiss banks show how ludicrous US bankster complaints about harsh treatment are. The US was the source of not just the high risk, predatory model that became pervasive among the biggest financial firms; it also exported toxic assets on a large scale. The Swiss remember the days when their banks limited themselves to the comfortable, lucrative business of serving wealthy private clients and have chosen to dial the clock back a bit. Banking regulators in other major financial centers should take note.
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Yves:
The led writes “shirk.” Did you mean “shrink”?
Aargh, thanks!
Any prosecutions, though; or are they finished after knee-capping them?
I know next to nothing about swiss law, but I suspect that it’d be much harder for them to prosecute than US.
Firstly, I believe majority of UBC/CS derivatives/structuring banking was done via UK entities. Swiss do not do extrater. prosecution (unlike US).
I don’t believe Swiss have SOx equivalent (which, although not intended so, should be a very easy tool to at least initiate US bank prosecution).
Likely, the only way Swiss could prosecute was if some S-located clients would be harmed, and I suspect that even that would be hard, and the clients would likely have to prosecute in a different jurisdiction – at least initially – since most contracts would be most likely under English law.
It’s partially the laws that are different. But mostly ist the unwillingness of prosecutes to engage in any proceedings against major corporations, they lack resources and knowledge anyway to file a successful criminal case. So they rather go after whistle-blowers.
George “Adam ‘Gerry Goodman’ Smith” Goodman’s _Supermoney_ from 1972 mentions Paul Erdman, who went to jail in Switzerland for crashing United California Bank in Basel. The charge was Verdacht der ungetreuen Geschaeftsfuehrung — basically bad business management. Maybe it helped that he was small and from somewhere else (that’s not unknown in the world), or maybe the Swiss are an example of being really serious about banking.
Adam Smith’s books are great. Well-written and timeless. Also recommend “The Money Game” and “The Roaring ’80s”.
Those plus “Paper Money” (minus “The Roaring 80’s”, which somehow I missed) underpin most of what I know about finance. I think they’ve left me needing some kind of follow-up course, Nakedcapitalism 201 maybe, to get a ready appreciation of how the different markets fit together. The People Who Know around here seem to know that.
“ungetreu” is a little stronger than simply “bad management” — more like “bad faith management”, or “unfaithful management”, at least in everyday language. Who knows, of course, what it means in the law ;-)
The other thing I suspect about the Swiss banks is that their upper management is woven into a peer group of the Swiss elite that is in a better position to put pressure on them. This is less true than it used to be, but these cultural matters matter, and the Swiss elite has along history of closely intertwined connections — which leads to cartels, on the one hand, but also to social discipline for the values of the group, on the other.
That’s no wonder if you consider the size of the Swiss Economy and the size of the country in general… Even if you wanted to separate all of it (economy and politics), it would not be possible.
The US has lost its political backbone to regulate private business right after Truman’s presidency. Remember Eisenhower’s “military industrial complex.”
I am 100 pages into Kevin Phillips’ _American Theocracy_ (cheerful I know), and he spins off from Eisenhower to so many different kinds of complexes.
oil-national security complex
borrower-industrial complex
oil-finance-military-industrial-intelligence complex
GOP-business-religion complex……..
It’s, uh.. fun.
*Can’t Make* – Kevin Philips *got religion* and turned tables. Connect:
“AMERICAN DYNASTY: Aristocracy, Fortune, and the Politics of Deceit in the House of Bush” (2004, Viking, NY);
“Old NAZIS, the NEW RIGHT, and the REPUBLICAN PARTY” by Russ Bellant (1988, 1989, 1991; South End Press, Boston);
“META-POLITICS: The Roots of the NAZI Mind” by Peter Viereck (1941, Alfred A. Knopf, Inc., NY; expanded 1961, Capricorn Press, NY);
“SACRED CAUSES: The Clash of Religion and Politics, From the Great War To the War on Terror” by Michael Burleigh (2006, Harper Collins, Great Britain; 2007, Harper Perennial, NY);
“WAR IS THE FORCE THAT GIVES US MEANING” by Chris Hedges (2002, Public Affairs, NY) and “AMERICAN FASCISTS: the Christian Right and the War on America” by Chris Hedges (2006, Free Press, NY);
“THE FAMILY: The Secret Fundamentalism at the Heart of American Power” by Jeff Sharlet (2008, Harper Collins,NY) and “C Street: The Fundamentalist Threat to American Democracy” by Jeff Sharlet (2010, Little, Brown and Company, NY);
“PURSUIT OF THE MILLENIUM: Revolutionary Millenarians and Mystical Anarchists of the Middle Ages” by Norman Cohn (1957, 1961; revised and expanded 1970; reprinted 2009, Barnes & Noble, NY by arr. with Oxford University Press).
“We have met the enemy…”
Hedges’ book is “War is A Force . . .” not “The Force . . .” Makes a difference!
Thank you for the book ideas, L B R!!
I wish I wasn’t a slow reader.
Jeff Sharlet is the best. At the moment I just know him from streaming videos on Bloggingheads rather than sitting down with his 2 books, though I would like to read them eventually. The Bloggingheads are terrific – long interviews that are dense with information. I don’t have the clip at my fingertips but someone (Michelle Goldberg I think) asked Sharlet, “What is the connection between the Tea Party and The Family?”
And Sharlet said, “Jim DeMint.”
Another thing.. I think we need tech in there someplace, like a security-technology complex. Judging by this kind of Guardian article about David Cameron:
http://www.guardian.co.uk/media/2011/aug/11/david-cameron-rioters-social-media
I doubt this will be the last time that such a thing will be brought up, with violent outliers as a pretext for clamping down on everyone.
Also there have been some recent remarks by Yves about Google and about the iPad. I need to dig them up so I can cite them correctly.
I made a note in my _American Theocracy_. Phillips is writing about oil and gas companies, and he considers silicon valley benign by comparison: “high technology and entertainment, industries in which chief executives frequently had ponytails, hosted liberal Democrats, and tagged companies with un-Republican names such as Yahoo!, Google, Pixar and DreamWorks SKG. Petrodiplomacy was peripheral to this worldview.” I disagree with KP for going so easy on them here. Of course it’s just not his bailiwick in this particular book, but if you stipulate a security-technology complex, the first two at least need to be scrutinized hard.
America has replace the Third Reich.
Question is – what are we going to do about it. Guess – all of us want to live, even if living means to walk on our knees.
Didn’t UBS also employ that POS criminal Phil Gramm? I think the Swiss Central Bank should do some serious investigating of that institution.
Probably one of the wealthiest native Jaw-Jaw bawez eva.
“POS criminal Phil Gramm” via Wikipedia:
“As of 2009, Gramm is employed by UBS AG as a Vice Chairman of the Investment Bank division. UBS.com states that a Vice Chairman of a UBS division is “…appointed to support the business in their relationships with key clients.” He joined UBS in 2002 immediately after retiring from the Senate.”
“2008 Nobel Laureate in Economics Paul Krugman, a supporter of Barack Obama and former President Bill Clinton, described Gramm during the 2008 presidential race as “the high priest of deregulation,” and has listed him as the number two person responsible for the economic crisis of 2008 behind only Alan Greenspan. On October 14, 2008, CNN ranked Gramm number seven in its list of the 10 individuals most responsible for the current economic crisis.
In January 2009 Guardian, City editor, Julia Finch, identified Gramm as one of twenty-five people who were at the heart of the financial meltdown. Time included Gramm in its list of the top 25 people to blame for the economic crisis.”
Dear Economic Literates;
This layman asks: If the Swis banks “spin off” half of thier “risk-weighted assets,” just who will be dumb enough to buy them? After all, these are supposed to be the ‘smartest in the room,’ no? If they flee in terror from certain ‘financial assets,’ shouldn’t everyone else also? So, does this mean signifigant ‘haircuts’ for these two banks? Is that the real meaning of the phrase used, “shrink its business dramatically?”
An enquiring mind wants to know, because this will soon be coming to a bank near you; with appropriate community fall out.
From “The Economic Illiterate’s Dictionary”:
SPIN OFF, v.t. In banking circles, a euphemism for selling bad debt to a central bank for dollars on the penny or, alternatively, for selling it to taxpayers, again for far more than it’s worth. It has been commonly used by bankers since 2008.
Maximilien;
Thanks for the lead. I’m a natrural demographic for that Tome.
And, oh s—! We’re going to be left holding the bag yet again!
BIS must have received *intervention* (or *gotten religion*) by some means. Yes, it’s time for banksters to get off the sauce, quit the booze, cry for the water wagon. Coming down from *HotCheapMoneyByInsiderStealth* addiction won’t be fun. But it is necessary.
For *Here’s how* see the classic Otto Preminger film: “THE MAN WITH THE GOLDEN ARM” – 1995 – Frank Sinatra, Eleanor Parker, Kim Novac, Arnold Stang, Darren McGavin.
Yves,
By allowing the banks to meet the capital requirements using contingent convertible securities, the Swiss National Bank is setting in place market discipline.
With the current level of disclosure into the black box that each of these banks represents, who would buy these securities and the opportunity to lose all your money from hidden losses?
The only way that the market for these securities will develop is if banks adopt Dallas Fed President’s Richard Fisher’s ultra-transparency disclosure model.
Then potential investors can actually assess the risk of the banks and see if the contingent convertible securities offer a reasonable risk/reward tradeoff.
“If welook at the list of Rhodes Trustees, we see that the Milner Group always had complete control. Omitting the five original trustees, we see that five of the new editions were from the Milner Group, three were from the Rhodes clique, and three represented the outside. In the 1930s the Board was stabilized for a long perios as Amery, Baldwin, Dawson, FISHER, Holland, and Peacock, with Lothian as secretary. Six of these seven were of the Milner Group, four from the inner core.” [p. 87] – “THE ANGLO-AMERICAN ESTABLISHMENT” by Carroll Quiqley (n.d., GSG & Associates Publishers, San Pedro CA).
CONNECT the dots and follow the DNA: Rhodes Trust, Milner Group, The Roundtable Group, FISHER, Dallas Fed, Dallas School Book Depository, G.H.W. Bush, CIA, JFK.
Connect Kevin Philips re Bush Dynasty and American Theocracy; consider: *House of Bush/House of Saud* going back to Victorian Reich DNA in London, Berlin, St. Petersburg. See: Preparata: “CONJURING HITLER” and reconsider Walker-Bush to Dulles to Sullivan & Cromwell to Reich III unto Reich IV. Follow the drug money on YouTube with Bush, Clark Clifford-BCCI “arabic money” connection to Afghan POPPY. BigOilArmsMonopolyFinance AfPak and Unocal’s Karzai for Poppy. Connect Victorian Reich to Russell Opium to YALE’s Bones for “NOBILITY” Anglo-American bonding uber alles; Howard Hunt for Poppy in DALLAS, DALLAS, DALLAS.
Connect with Rhodes/Milner/Roundtable Anglo-American Establishment DNA in perpetuity. The *System* fix is in.
This is what *OCCUPY OCTOPUS* is all about: the 1% DNA Dynastic Despotic Tyranny now in place. As ever, the *Court Jews* like Henry Kissinger have joined the “NOBILITY” in “The War Against the Jews”(Loftus and Aarons), in ReichIV as in ReichIII. Are you surprised?
The “Mein Kampf” for HolyRomanReichIV is Correa de Oliveira’s “NOBILITY and Analogous Elites in the Allocutions of Pius XII” (1993, TFP, York, PA).
Place Penn State scandal within this frame.
Footnote to above: “NOBILITY and Analogous Traditional Elites…” was required reading for the *next generation* at The University of DALLAS–a Roman Catholic, Opus Dei stronghold. DALLAS is the city that George W. Bush now calls “home* – “MISSION ACCOMPLISHED” indeed; but not quite: although “The Decider”, he failed to become the *Next Hitler* DE JURE while in Presidential Office.
There’s a rumor afloat re *writing in* JEB BUSH for President. For Poppy, it’s “never say die.” Who is pulling his strings?
Given how the bank execs have demonstrated how little they care about the common shareholder, only about their cash pay packet size, why anyone would buy stock in a bank is unclear.
Actually that might be a good protest idea, start a buyers strike for bank equity. Look at how the sovereign wealth funds got taken to the cleaners in 2007 at Citi at least. And these were sophisticated investors.
Perhaps we should just let the holding companies go belly up and protect the actual banks, like was done with WAMU.
Uh, doesn’t this mean more pressure than already exists for European bonds?
I love the rich pendancy of your opening line. Closing the loop a bit then, if such a horrific event were to be widely publicized here, why it might lead to folks wondering why such risk-limiting actions have not happened here. Why indeed? Might the word “looting” have something to do with it?
UBS: $2 billion “rogue-trading” loss. $2 billion in bonuses still paid out. Something to do with employee “morale”.
Anyway, nice to see the regulators have finally arrived on the scene.
1) “The Swiss National Bank, unlike any other sugar daddy rescuing reckless banksters, forced UBS to hire independent parties”
In short, the referee is paid by one team. Does anyone really believe that will be independent? Or maybe he have pretended to see that the financial trash was 100 (a figure higher than that allowed by the banks) when in fact it is 1000, which otherwise makes the bank’s game.
2) The Swiss banks are the repository of the accounts of all the dirty money of dictators, mobsters, fraudsters around the world. Even without the scrap financial, liquidity will never fail. But who knows because neither the auditors ‘independent’ nor the Swiss have asked (the first) and imposed (the second) to abolish banking secrecy. Here’s the real reason why banks have not put the seat of the high-risk activities abroad: the other tax havens are too small to be able to intervene in a crisis, and countries big enough to do NOT allow banking secrecy, and so would force banks to make it clear first and last names of the criminals they invest the money.