The UBS saga continues. I was struck by the last two paragraphs:
In its most recent quarterly filing, UBS said that Robert M. Morgenthau, the New York district attorney, had issued a subpoena to the bank for the names of all United States clients who carried out wire transfers from their UBS accounts based in America to their UBS accounts based in Switzerland in recent years. The 70 names that UBS turned over were covered under that subpoena.
“We have not breached Swiss
banking confidentiality,” said Karina Byrne, a spokeswoman for UBS,
adding that the bank had not provided what she said was “Swiss-based client data.”
I'm not close to this situation, and I'm far from an expert in private banking, but my hunch is that when UBS was pitching these offshore accounts to US clients, they fell all over themselves to trumpet how Swiss banking secrecy laws would protect clients from unwelcome inquiries by outside tax authorities like the IRS: "Don't worry, we won't give up your names to the IRS or the Justice Department because we're simply not allowed to." That commitment didn't last. Look for lawsuits.
If there is a lesson here it may be this: If you're considering entering into an arrangement with another party and there is some legal risk involved, ask yourself
1) What does the other guy gain by sweet-talking you into downplaying the legal risk?
2) If the potential legal risk becomes actual legal risk, what does the other guy lose by selling you out?
In the case of UBS, the answer to the first is, unsurprisingly, "a lot": Being able to charge fees on $20 billion is a good deal. The answer to the second, a little surprisingly, is "not that much." UBS will suffer great reputational harm from all this, especially in the US, but chances are that will blow over in time. It may have to walk away from a significant piece of US wealth management, but it will survive. It certainly has a brighter future than many of its clients whose names are now in the hands of US prosecutors.
I guess this is another point in favor of the boutique wealth manager model: You want whoever handles your money to go out of business, or worse, if it should ever mistreat you.
Update: I spoke too late--UBS has already been sued. I expect many more though, perhaps an (upper) class action lawsuit.
Via the Washington Post. Leaving aside the ethics of tax avoidance, any American who had an undeclared offshore bank account at UBS made a bad decision. Whatever they saved in taxes was more than outweighed by the risk and consequences of being caught.
The article mentioned that about 1,000 out of the 20,000 American clients of UBS Switzerland did disclose their bank accounts to the IRS. Which to me means they maintained these offshore accounts not for tax avoidance/secrecy, but for other reasons, perhaps related to our Family Foresight Thought Experiment. I'm not yet an expert on the subject but the idea of offshore safe havens fascinates me. Not the tax part--if you're American you should pay your taxes, especially if you're already rich--but the idea of a place where your money is safe from the depradations of war, pogroms, dictators, etc. I hope to do more research on this subject and address it in a future post.
Another article about hedge funds owned by big banks not thriving.
Keep in mind also the issue of adverse selection. What kind of swashbuckling hedge fund manager would submit to being an employee of a huge institution? Isn't that like Blackbeard the Pirate joining the Royal Navy?
It's not the only thing to look at--but it's one thing to look at.
I've posted before about how private banks don't do a very good job investing their clients' money, which to me should be the main service they provide. The other service they provide, tax evasion strategies, can be more trouble than it's worth (especially for US citizens--maybe it's different for citizens of other countries), as all these recent articles about UBS show.
And yet private banking is one of the fastest growing areas in finance, and most large private banks earn excellent returns on capital (for themselves, that is. Not to be confused with the returns they earn for their clients). So a lot of rich people seem to think they provide a service worth paying a lot for.
My question to all of you is: Are there any defenders of private banking out there? I'm interested to know the arguments in favor of becoming a client, especially of the larger well-known banks, and especially for US-based individuals or families. Feel free to leave a comment or just send me an email at the address at the top of this page.