UBS AG has finally put its lingering problems behind after settling with the U.S. Internal Revenue Service (IRS) and giving up the identities of American tax evaders.
Last week, UBS—the largest Swiss bank—finally agreed to disclose to the IRS the names of 4,500 accounts held by Americans suspected of tax evasion.
The settlement is a huge blow to the Swiss banking industry, which in the past has thrived on its principles of secretly while attracting customers around the world. Obtaining the names of Americans was deemed by analysts to be a first major step in cracking the Swiss code.
During the last year the IRS has been putting a lot of pressure on the Swiss government and banks demanding to identify 52,000 accounts of American citizens suspected of holding undeclared Swiss bank accounts to evade taxes. Additionally, the IRS filed a lawsuit against UBS for criminal charges intending to take UBS’s banking license away in the United States and demanding it to pay billions of dollars in fine.
Such pressure from the IRS was on top of the gigantic problems the bank was already facing—UBS lost a total of $28 billion in the past two years. The bank was practically devastated by investing heavily in the U.S. real estate market.
The decision to disclose the 4,500 American accounts has given UBS a second life. In agreement with the IRS, the lawsuit will be lifted and all IRS fines would be forgiven.
Immediately following the agreement to disclose the secret information last week, the Swiss government sold its equity stake in UBS and made a net profit of $1.1 billion. That is a 32 percent net gain on investment that goes to Swiss taxpayers.
This amounted to the first success story of a European government making money while lifting its banks out of trouble.
“They are substantially in the money,” said Guy de Blonay, a fund manager at Herderson New Star in London. “It looks pretty good.”
The Swiss government gave $5.6 billion to UBS last October in form of debt convertible into the common stock, in order to help drag the bank out of its tenuous financial situation.
Analysts hail this as a great example of how federal bailouts can be a win-win proposition. Even long before the collapse of Lehman Brothers, AIG, and the U.S. financial markets, the Swiss government already had a solution ready for saving UBS.
“Already in May, 2008, we were prepared and UBS was not even informed about our preparations,” said Jean-Pierre Roth, the former Chairman of Swiss National Bank.
When UBS came asking for help in late October, the program was implemented the very next day.
“The Swiss are watch makers, and they present their watches only when they are ready,” said Roth referring to the precise manner in which the Swiss work, taking in account and calculating multiple strategies before they actually implement something.
The sale of the common stock was triggered by lifting the damaging lawsuit that was hanging over UBS’s head. Now that the case is resolved, investors felt more comfortable about the bank’s future and also started to buy its stock.