Details of a landmark settlement of the U.S. tax case against Swiss bank UBS are expected this week, which should help the bank restore its image and open the way for the Swiss state to sell its UBS stake.
The deal could be announced as soon as Wednesday after the first regular meeting of the Swiss cabinet following the summer recess, industry insiders said.
The world's second-largest wealth manager will hand over details of about 5,000 client accounts, sources have said, after the signing of a deal agreed last week to end a dispute in which U.S. tax authorities originally asked for details on 52,000 clients suspected of tax evasion.
The (U.S.) Justice Department summons deal looks favorable for UBS and for Switzerland, said Vontobel analyst Stefan Schuermann. However, we remain cautious as long as we do not know the exact figures and details of the deal.
The reputational damage to UBS will take time to repair, and money outflows, which totaled nearly 40 billion Swiss francs ($37.21 billion) in the second quarter alone, will probably continue for a while, said Schuermann.
The client accounts to be disclosed will likely belong to people suspected of committing tax fraud under the terms of a double taxation agreement that obliges Switzerland to provide help if Washington seeks it in a criminal investigation. The New York Times said last week 150 wealthy U.S. clients of UBS were likely to face prosecution by the Internal Revenue Service (IRS).
The IRS's resources are not limitless, and it is clear they will just go after the big fish, said ZKB analyst Andreas Venditti.
SWISS GOVERNMENT WITHDRAWAL
The signed settlement would remove an important obstacle to the Swiss government offloading its 9 percent investment in UBS held as mandatory convertible notes (MCNs), prompting media speculation that an announcement on the state's investment could come at the same time as the settlement details.
Government advisers seem to suggest the MCNs will be converted once UBS stabilizes. A settlement with the US government was one of the key issues, so if it comes it should not take too long for the government to convert and place its shares, said Cheuvreux analyst Christian Stark.
Shares in UBS are currently trading at around 16.80 Swiss francs, well above a 12.50 francs break-even point for the Swiss government, taking into account the 12.5 percent coupon the bank must pay on the MCNs until maturity in 2011, even in the case of a share conversion.
If the government converts on or below the minimum reference price of 18.21 Swiss francs, it will receive the maximum of 330 million shares under the terms of the agreement.
These are not the only factors the government will consider.
It is more the government's thinking on the bank's stability, said Venditti, noting the economic crisis was yet to end. They would look really bad if they got out and had to get back in again.
The government, which has said all along it would prefer to exit UBS as soon as possible, would also need to find willing buyers once it decided to sell the stake.
If they want to sell the convertible notes at 100 million francs a piece they need very big investors. If they convert first, then they can place smaller amounts with more investors, Venditti said.
IMPACT ON OTHER BANKS
Washington's lawsuit against UBS strained relations between the United States and Switzerland because it challenged Swiss bank secrecy laws, posing a wider threat to the country's wealth management industry.
It has also been part of a wider international campaign to end the avoidance of taxes using offshore accounts and tax havens.
The focus will be on the precedent the agreement sets in terms of respecting Swiss legal proceedings, and the extent to which fishing exercises by other governments become feasible, said Cheuvreux's Stark.
The deal should formally leave secrecy laws intact, but many Swiss private bankers say the country's bank secrecy has been badly damaged and that they now see Swiss stability and expertise as the main selling points of their industry, which manages around $2 trillion of foreign wealth.
Those who will suffer are those smaller organizations in Switzerland and Liechtenstein who were living off banking secrecy and nothing else, said Stephane Garelli, professor of international business policy at Lausanne University.
They will struggle and maybe disappear because they only had the one product, he said.
(Additional reporting by Martin de Sa'Pinto, editing by Will Waterman)
($1=1.075 Swiss Franc)