Swiss Affairs

Bloomberg: Credit Suisse Said to Have Urged Clients to Dump Madoff Funds, Jan. 7, 2008

Credit Suisse Group AG, whose clients lost almost $1 billion in Bernard Madoff’s alleged swindle, urged customers more than eight years ago to withdraw cash from his firm because the bank couldn’t determine how he made money, said three people familiar with the matter.

Oswald Gruebel, who headed the private-banking unit of Switzerland’s No. 2 lender at the time, made the recommendation after meeting Madoff in New York in June 2000, the people said, speaking anonymously because the details were private. Credit Suisse customers proceeded to redeem about $250 million from Madoff-run funds, half the total held by the bank’s clients, the people said. read more

Watch this and you might get the same bad feelings as Mr. Gruebel!

The Economist published an excellent article about the re-focusing process of UBS which started restructuring much earlier than other European banks as they were early hit by tremendous subprime losses. A recovery of UBS would be great news for the Swiss banking market as UBS is a tremendously important part of the system.

"UBS was one of the first to feel the effects of America’s subprime meltdown. That had some advantages. The Swiss bank started raising capital while private money was still available (although it has since had to call on government help). It installed a new leadership team relatively early. And it cut staff numbers hard, which will help during chilly times ahead..."

"The bank is also in the process of separating into three autonomous units: wealth management, investment banking and asset management. Central to this reorganisation is an overhaul of the bank’s internal funding mechanisms—many of UBS’s problems lay in absurdly cheap financing for its investment bank."

"Importantly, the reorganisation has also made it clearer what UBS is for. The bank has affirmed the importance of its market-leading wealth-management arm as its main franchise. That was not always the case. “It was less clear under Ospel that wealth management was the core business,” says a former UBS executive."

Source: Extracts from the Economist article linked to above

Swissinfo: CS sells chunk of asset management firm, Dec. 31, 2008

"The Credit Suisse Group has signed an agreement to sell part of its asset management business in return for a stake of up to 24.9 per cent in Aberdeen Asset Management.
Switzerland's second-largest bank said in a statement on Wednesday that the stake was valued at about SFr381 million ($361.15 million).

The sale includes SFr75 billion of assets under management. Under the terms of the deal, Credit Suisse will have a seat on the board of Aberdeen.

The deal will see Aberdeen, which currently has $160 billion in assets under management acquire an additional $27.7 billion of assets, making it Britain's largest-listed fund manager.

"We believe this transaction offers our clients a compelling opportunity, providing them with access to an enhanced suite of investment products provided by a premier manager that has historically had strong performance across many asset classes," commented Rob Shafir, CEO of Credit Suisse's Asset Management Division."

KOF Economic Barometer for December 2008

Negative GDP Growth – KOF Economic Barometer

"In December 2008 the barometer fell to –0.39 points. Thus, it is signalling that during the next few months the Swiss economy is likely to contract. The KOF Economic Barometer fell by 0.35 points compared to November (revised from –0.05 to –0.04) and now stands at –0.39. Accordingly, Swiss gross domestic product (GDP) in the first quarter of 2009 can be expected to be lower than in the first quarter of 2008. The KOF economic barometer is based on a multi-sectoral design with three modules. Their contribution to the development of the barometer is as follows: The Core GDP module (GDP excluding construction and banking) continues to point clearly downwards. The Construction module is also heading south, although less pronounced. The Banking module is remaining on a comparatively low level and is hence unable to offset the overall trend. The Core GDP module module accounts for more than 90% of Swiss GDP and hence dominates our barometer. The decline in the Export Destination EU measurement model has gained momentum. The Swiss Industry and the Swiss Consumption measurement models also continue to deliver lower readings."

Kunden der Credit Suisse verlieren ca 1 Milliarde, Dec. 28, 2008

Clients of Credit Suisse and UBS might have lost more in the Madoff case than originally expected, Swiss newspaper Sonntag AZ reports. Sonntag AZ reports that clients of these two banks might have lost Swiss francs 3 to 4 billion.

Credit Suisse confirms that clients have lost in Madoff products. However, the bank points out that they never have actively recommended to clients to buy Madoff products. Also UBS mentions that Madoff products have never been on the bank's recommendation list.

Is Basel II Enough? The Benefits of a Leverage Ratio Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, Financial Markets Group Lecture, London School of Economics, London , 15.12.2008

"To conclude, leverage has been a major contributing factor in the current financial crisis. Excessive leverage has amplified the shocks to the financial system. Moreover, the now inevitable de-leveraging is imposing further stress on the system. To enhance the longerterm resilience of the financial system, effective regulation to curtail banks’ leverage is required.

In an attempt to put a lower bound on banks’ leverage, I strongly support enhancing current risk-weighted capital requirements with a simple leverage ratio. A leverage ratio effectively serves as a safety valve against the weaknesses and shortcomings of riskweighted requirements. It ensures a minimum capital buffer that protects banks against unexpected losses and underestimation of risk.

As we have learned from the current crisis, the failure of risk models may quickly turn banks that seem comfortably capitalised into poorly capitalised banks. Let me emphasise again that I don’t advocate replacing the current Basel II regime with a leverage ratio. This would be unwise, as we would forgo all the advantages of the risk-weighted requirements. In particular, we would lose valuable indicators of banks’ levels of risk. And, quite frankly, there is no real alternative in sight, at least not readily.

In discussions with my central banking and regulatory colleagues I detect increasing interest and willingness to examine and consider the proposal of a leverage ratio as a complement to the risk-weighted capital regime under Basel II...

...A leverage ratio addresses excessive leverage in the banking system. It does not address credit concentration, excessive maturity mismatch or undue reliance on asset market liquidity. Financial crises, let alone financial cycles will never be eliminated. Our aim must be to ensure that the negative consequences, both to banks and to the real economy, remain manageable.

Putting in place a shock-absorbing leverage ratio to complement the risk-weighted framework of Basel II will help us get one step closer to this goal."

Source: Extract from Philipp Hildebrand speech linked to above

KOF Swiss Economic Institute: Swiss economy in recession, Dec. 17, 2008

"In comparison to the autumn forecast, the global economic framework conditions have worsened sharply for the Swiss economy. In the meantime, the USA and a host of European economies have slipped into a recession. Until autumn, Switzerland’s domestic economy appeared surprisingly resilient in light of the international situation,but now it can no longer withstand the downward trend. Industry orders have noticeably waned and the value of the assets administered by the financial industry has measurably dwindled. Still, our forecast for the current year has only been modified slightly; the annual figure for the GDP growth rate was lowered by 0.1 percentage points (PP) to 1.8%.The revision for 2009 is however more marked: 0.8 PP to –0.5%. Growth in Switzerland will only resume at the end of 2009.We estimate that the growth rate for 2010 will be 0.6%.

The intensity and length of the downturn and the rising unemployment, above all, will result in a temporary dip in private consumption.The outlook for export demand is a lot worse, since the international economic downturn is now estimated as being much sharper than previously though. This development will lead to an appreciable drop in investments in machinery and equipment and commercial buildings. For the labour market, we expect a moderate rise in unemployment to 2.8% and 3.5% for the next two years, respectively. Full-time equivalent employment should only begin climbing again in about two years’ time.
The government will strive to take countermeasures in order to prevent a dramatic drop in
the GDP."

Reichmuth is a Swiss private bank with approximately Swiss francs 11 billion of assets under management. The exposure to the Madoff funds is consequently 3% to 4% of these assets.

Swissinfo: Another Swiss bank admits Madoff exposure, Dec. 13, 2008

"The Lucerne-based private bank, Reichmuth Matterhorn, is the second Swiss financial institution to admit investing in the fraudulent scheme of Bernard Madoff.
Reichmuth Matterhorn said in a statement that it had investments in hedge funds associated with the Wall Street trader of around SFr385 million ($327 million).

On Friday, wealth management bank, Bénédict Hentsch, said it had entrusted Madoff's investment company with SFr56 million of its clients' assets.

The Le Temps newspaper reported that hedge funds and other financial institutions in Geneva had invested SFr5 billion ($4.25 billion) in the phoney scheme.

However, the regulatory body, the Federal Banking Commission, said it was unable to confirm the extent of the impact of the Wall Street scandal on Switzerland.

Madoff, a former Nasdaq stock market chairman and founder of an investment securities company bearing his name, was arrested on a securities fraud charge on Thursday.

He is suspected of running a phoney investment business that lost at least $50 billion and amounted to nothing more than a "Ponzi scheme" - a pyramid-type swindle in which very high returns are promised to early investors."

Swissinfo: Geneva firms hit by phoney Madoff scheme, Dec. 13, 2008

"Reports say hedge funds and other financial institutions in Geneva invested SFr5 billion ($4.25 billion) in the fraudulent scheme of Wall Street trader, Bernard Madoff.
The report in the Saturday edition of Le Temps newspaper followed Friday's revelation by Swiss wealth management bank, Bénédict Hentsch, that it had entrusted Madoff's investment company with SFr56 million of its clients' assets.

However, the regulatory body, the Federal Banking Commission, said on Saturday it did not have any details as to the extent of the impact of the Wall Street scandal on Switzerland.

Madoff, a former Nasdaq stock market chairman and founder of an investment securities company bearing his name, was arrested on a securities fraud charge on Thursday.

He is suspected of running a phoney investment business that lost at least $50 billion and amounted to nothing more than a "Ponzi scheme" - a pyramid-type swindle in which very high returns are promised to early investors."

The Wall Street Journal reports that also the Zurich based bank Neue Privat Bank is hit by the Madoff scandal:

"Nomura and Neue Privat Bank, meanwhile, together marketed access to Fairfield Sentry Ltd., a fund overseen by Mr. Madoff and sold through Fairfield Greenwich. The shares offered by Neue Privat and Nomura were leveraged three times -- meaning $3 of borrowed money was added to every $1 of capital invested in order to magnify returns, greatly increasing the potential losses for those investors."

Some major questions:

Why haven't they done their in depth due diligence?
Why didn't they get suspicious about the steady and stable positive returns?
Why didn't the SEC get suspicious much earlier?

Related articles:

The Australian Business: Red flags in Bernard Madoff's alleged giant Ponzi scam, Dec. 13, 2008

Time: Hanging with Bernard Madoff (It wasn't memorable), Dec. 12, 2008

Yahoo Finance: Madoff fraud case raises questions about SEC, Dec. 12, 2008

Wikipedia: Ponzi scheme

"A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.

It usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises (and pays) requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases."

Source: Wikipedia

Unfortunately, the Madoff system, despite being huge in size, has not been interrupted by legal authorities before it collapsed. It will be interesting to see why this was the case..

Introductory Remarks, End-of-year Media News Conference, Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, End-of-year Media News Conference, Zurich, Dec. 11, 2008

"The Swiss economy is of course affected by this worsening of the international environment. At our September assessment, we were still projecting a marked slowdown in activity, but with growth remaining positive in 2009. We are now forecasting that GDP growth will be negative, not only during the first two quarters of next year, but also on
average for 2009 as a whole. With the probable exception of consumption, all demand components should decline.

Exports of equipment goods, demand for which is known to be cyclical, will be affected. In most countries, difficulties in sales and distribution, on the one hand, and restrictions on lending conditions, on the other hand, have prompted a downward revision of investment plans. The US and Europe are cases in point, but a loss of momentum is also being observed in emerging markets. These developments will weigh heavily on our exports of equipment and intermediate goods made by US and European manufacturers will also impact on their Swiss- based suppliers. The metals, machinery and electronics industry was the first to experience a sharp correction in new orders.

The worsening outlook for sales will lead to an adjustment of investment plans in Switzerland as well. Domestic demand for equipment goods could even turn out to be the most severely affected component of final demand. Developments have been slightly different for the construction sector and its most important component, residential investment. Housing construction has been in decline for the past few years, although the cut in interest rates could now halt this trend.

All these factors have brought about a sharp deterioration in business confidence, which should put a damper on job creation in our country. Unemployment will start to rise again.

Consumption should continue to grow, but at a considerably slower pace. The household sentiment indicator was sharply down at the beginning of the fourth quarter, reflecting expectations of greater job insecurity. In contrast, the unexpected fall in inflation will
contribute to an increase in real income, which will support consumption.

For 2009 as a whole, the SNB is forecasting a decline in real GDP. This decline is likely to lie between 0.5% and 1%."

Source: Extract from speech linked to above

Swissinfo: Swiss rate well on bribe index, Dec. 9, 2008

"Swiss firms are unlikely to pay bribes to win business, according to a survey by anti-corruption organisation Transparency International.

Switzerland was ranked joint third along with the Netherlands in the Bribe Payers Index (BPI), which lists 22 of the world's largest countries in terms of honesty.

The survey of 2,742 senior business executives from around the world found that only Belgium and Canada were considered less likely to make payoffs.

Firms in Russia were rated the worst offenders, just above China, Mexico and India.

The cleanest sectors in terms of bribery of public officials were information technology and fisheries and finance. Most bribes took place in property development, mining, oil and gas, and firms in public works contracts.

Switzerland was ranked top in 2006, but dropped this year after criteria for the BPI changed."

Swissinfo: Jobless figures climb steeply, Dec. 9, 2008

"The unemployment rate rose sharply in November, climbing to 2.7 per cent from 2.5 per cent in October, the State Secretariat for Economic Affairs reported on Tuesday.
The number of registered unemployed rose by 7,181 to 107,652 - the first annual rise in four years - indicating that the financial crisis is starting to bite.

In a statement, Seco said the number of vacancies dropped by more than 13 per cent compared with November 2007 to 11,927." read more

Credit Suisse CEO Brady Dougan has announced this week that his bank lost Swiss francs 3 billion in the last two months. The losses were primarily in investment banking, where the bank also made major losses with speculative investments being initiated during the financial crisis.

Swissinfo: Credit Suisse to eliminate 5,300 jobs, Dec. 4, 2008

Brady Dougan verspekuliert Milliarden - und Vertrauen, Dec. 7, 2008

Credit Suisse was in an excellent position at the beginning of the financial crisis as they decided early enough to reduce the engagements in the subprime market. Unfortunately, the bank was not able to exploit this position.

During the last months a lot of people thought that a Universal Bank model is superior to a pure investment banking model. The private bankers and commercial bankers of Credit Suisse would probably be glad not to have the speculators of the investment bank in the same boat.... Credit Suisse's investment bank has lost 10 billion this year... Their boss Paul Calello is still in charge!

A Swiss minister has expressed optimism for the national economy last summer and has called Switzerland "a special case" which will suffer economically much less than surrounding countries. As Switzerland is heavily dependent on exports we could call this minister "cheerleader of the year". Numbers below show that economic reality has catched up.

KOF Swiss Economic Instîtute: KOF Bulletin No. 14, December 2008, Extreme Measures Against the Economic Downturn

THE DYNAMICS OF THE SWISS ECONOMY ARE BECOMING NOTICEABLY WEAKER
Turbulences in the financial and stock markets, an international economy that has clearly cooled down, and the rising Swiss franc – the current crisis is attacking Switzerland on several fronts as an open economy with a large financial centre and a safe currency. As expected, export companies are particularly affected, but domestically orientated companies are also increasingly suffering. These are the results of the latest KOF survey of the Swiss industry. read more

Swissinfo: Recession in Switzerland moves closer, Dec. 4, 2008

"The Swiss economy stagnated in the third quarter, failing to grow for the first time in four years as companies cut back on investments.
The State Secretariat for Economic Affairs in Bern said on Thursday that year-on-year growth slowed to 1.6 per cent from 2.6 per cent in the second quarter.

"Switzerland is in or at least on the brink of a recession," commented analyst Jan Poser at Bank Sarasin. "Recent data suggest that the economy is already shrinking."

He said he believed the Swiss National Bank would cut its key interest rate again next Thursday, probably by 50 basis points.

Poser added that Switzerland had been doing better than its main trading partners in the euro zone, which was already in a recession, but the export-dependent country could not escape the slump.

The Swiss National Bank two weeks ago made a surprise 100 basis points cut in the three-month Swiss franc London Interbank Offered Rate to 0.5-1.50 per cent."

Source: Article linked to above

FT: AIG sells Swiss private bank to Abu Dhabi group, Dec. 1, 2008

AIG on Monday announced that it had sold its Swiss-based private bank to an investor group from Abu Dhabi, its first significant disposal since it was taken over by the US government in a massive bail-out.

Aabar Investments PJSC, a quoted investment group linked to the Abu Dhabi government, said it paid SFr307m ($253m) for the private bank, and would also assume outstanding loans of up to a maximum of SFr100m. read more

Swissinfo: UBS executives forgo bonuses, Nov. 25, 2008

Former UBS chairman Marcel Ospel and two other directors have waived bonuses worth a total of SFr33 million ($27.8 million).

Two-thirds was due to Ospel, with the remainder going to former vice-president Stephan Häringer and former finance chief Marco Suter, confirmed a spokesman for the three on Tuesday. read more

Tagesanzeiger: Die SP Schweiz wird UBS-Aktionärin, Nov. 24, 2008

Swiss Tagesanzeiger reports that the Swiss Socialist Party (SP) has bought one UBS share to be able to send a representative to the next UBS General Assembly. SP plans to send its president, Mr. Levrat. He intends to talk about the bonus plans and about the refund of bonuses by former managers.

We believe that active shareholders with a longer term orientation are more effective than any regulation. However, we also believe that politically motivated shareholders are not to the good of an enterprise to the longer term.

The remarks of Mr. Zuberbühler, the Head of the Swiss Federal Banking Commission, might become a self-fulfilling prophecy...

Swissinfo: Regulator admits UBS may need extra bailout, Nov. 23, 2008

"Switzerland's biggest bank, UBS, could receive another bailout if it faces more difficulties under the global financial crisis, the Federal Banking Commission says.
Daniel Zuberbuehler, head of the commission, would not rule out that UBS might need more government aid to survive the crisis, in an interview published in the SonntagsZeitung newspaper on Sunday.

"If you look at the development of the market, it is indeed open whether our package of measures will be sufficient," he said, adding that the government "might have to inject more capital".

He said a $60 billion (SFr68 billion) government bailout agreed last month with UBS had stabilised the bank's liquidity situation, and without which the bank would be a much worse position.

Around $5 billion of the bailout will be used to bolster the bank's reserves and $54 billion to help UBS dispose of high-risk securities.

Zuberbuehler said it was unlikely another bank would take over UBS, as a buyer would have to acquire the entire bailout deal. He ruled out a merger between UBS and Credit Suisse saying it would only add to the problems in the investment banking sector.

UBS declined to comment on the issue but a spokesman said the bank was in regular contact with the banking commission."

Swissinfo: Switzerland keeps credit squeeze at bay, Nov. 22, 2008

"The global credit crunch has yet not affected Switzerland, a top economist has said.
There has been "no trace" of the squeeze according to polls of the Swiss National Bank by the State Secretariat for Economic Affairs (Seco) or in its dealings with banks and businesses, the department's chief economist, Aymo Brunetti, said.

"Credit terms have not become significantly more restrictive," Brunetti told the economic review Finanz und Wirtschaft.

Brunetti admitted that as Switzerland was in the midst of an economic slow-down the outlook for companies had become less favourable and credit lending had lost some of its dynamism. "But that is normal," he added.

He said Seco had not yet concluded whether a recession was unavoidable but reiterated its forecast that the economy would grow by less than one per cent in 2009.

The brunt of the downturn in Switzerland has come from the export sector, making export industries and related investors the most affected by the financial crisis, he added."