February 1, 2010 - Phil Hodgen

Veiled threats of UBS bank failure

The ongoing excitement (Swiss courts calling “check” in the wrestling match with the IRS) has led to the inevitable talk that UBS will fail. The U.S. pressure on Switzerland to live up to the agreement to disclose 4,450 names will either lead to the Swiss Parliament taking actions which permanently alters the Swiss banking industry, or the U.S., in a fit of pique, will yank the license that UBS has to do business in the United States. Lose/lose.

This would seem to be the logical neutron bomb approach which would appeal to the U.S. government folks. “Dear Switzerland, if you don’t capitulate, I’m afraid we must amputate.”

Epic blunder theatre

This is epic blunder theatre and I’m glad I get to watch. It’s the stuff of political history 75 years hence. It’s not so fun to contemplate the economic crater that will be placed into Switzerland’s economy, but I fear that the Swiss financial industry crater is coming anyway–whether UBS continues to do business in the U.S. or not. I’ve seen a steady shift of wealth management business to other parts of the world in the last few years.

From the U.S. side this is yet another step towards economic isolationism. If UBS is chased off from the United States, other non-U.S. businesses should be wary of extraterritorial economic pressures being brought to bear by the U.S. Put bluntly, the U.S. has a hostage and an incentive to dispatch that hostage to oblivion. Short term thinking to the extreme, but that’s how governments operate.

(Guilty confessions: I’ve been reading William Manchester’s mesmerizing Churchill biography. This weekend I was deep into The Last Lion: Winston Spencer Churchill: Alone, 1932-1940. [Not an affiliate link]. Stunning book. Helps me to see things in this tax debacle that is unfolding before our eyes.)

Signal and noise

Enough of the big picture stuff. Back to the real world where you and I live. What to make of this? Where’s the signal? Where’s the noise? What action should you take today?

  • If you’re a U.S. citizen or resident and you’re in the voluntary disclosure program (you disclosed your bank accounts to the IRS and you’re wrangling through its procedures), this means nothing to you. Carry on. Pay attention or don’t. This will not have a direct impact on you.
  • If you’re a U.S. citizen or resident and you have an offshore bank account that you haven’t disclosed in the U.S., nothing changes immediately. Just take this as yet another indication that the tide is running against you. Secrecy as a tax minimization strategy continues to deteriorate. (I don’t recommend secrecy and nondisclosure as a way of life, by the way. Hoping for secrecy to protect you from the IRS is a bad bet economically, and a dreadful choice on a human level. You only live once, etc.) You will need to work harder to stay underground. More expense, more stress, more risk, and a higher cost when your strategy fails. In other words the expected value of your decision is slightly lower.
  • For non-U.S. businesses contemplating operations in the United States, the time has come for you to understand that the U.S. has a precursor risk of expropriation. If the U.S. doesn’t like what you are doing outside the United States, or doesn’t like what your home government is doing, you run the risk of losing your U.S. investment. At the moment this is a five-standard-deviations-from-the-mean risk. Don’t ignore this political risk. [Not an affiliate link]. I’m not saying this is a “today” risk. I’m just saying that this is a risk that you should put on your planning checklist.

Intrade, please!

We really need an Intrade market on the Y/N question of whether UBS AG will have an ownership stake in a U.S.-chartered bank on 31 December 2011. I’m guessing no.

US Real Estate Investments Voluntary Disclosure