"We're at a financial crossroads"

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The global financial sector is mired in its biggest crisis in decades. The situation in Switzerland is also critical, a banking expert tells swissinfo.

This content was published on September 21, 2008 - 10:12

But despite bankruptcies, emergency sell-offs and state intervention across the Atlantic, Manuel Ammann, head of the Swiss Institute of Banking and Finance at St Gallen University, believes Switzerland's largest bank is in no immediate danger.

On Tuesday UBS shares fell to SFr15.18 ($13.55), an all-time low, and more than 60 per cent down on the year. The bank has already written off $42 billion (SFr47 billion) on the US subprime crisis, forcing it to break up its One Bank strategy.

That followed a tumble of 14.8 per cent on "Meltdown Monday", when US investment bank Lehman Brothers went bankrupt, its Wall Street rival Merrill Lynch was sold at a knockdown price and the world's largest insurer, AIG, had to go cap in hand to the Federal Reserve for an emergency bailout.

swissinfo: The financial sector has had a black week. Is this a once-in-a-century crisis?

Manuel Ammann: Yes. We haven't seen so many large financial institutions disappear in such a short time through bankruptcy or takeover, or need to be rescued by the US government, for decades.

swissinfo: Is the worst over or will there be more disasters?

M.A.: No one knows. We're at a financial crossroads: the market could pull itself up, with new buyers emerging, or we could be in the middle of a vortex and could continue going down.

Only when the worst is over will investors be willing to take risks again. For a sustained recovery, there has to be stability in real estate market conditions.

swissinfo: The US government has pumped $900 billion into depressed financial institutions. Were they right to do so?

M.A.: State rescue operations are generally negative. The private sector must pull itself out of the quagmire. Institutions should be left to go under so that the market understands the risks. If there is the impression that everybody will be rescued, it opens the door to more high-risk behaviour [so-called "moral hazard"].

swissinfo: Are taxpayers bleeding on behalf of large corporations – privatising profits and socialising losses?

M.A.: In some ways, yes. When the state jumps in, it also bears the risk. Hence the strict conditions – for example, with AIG, when its assets were used as collateral [the Federal Reserve gave AIG a two-year, $85 billion loan in exchange for a nearly 80 per cent stake in the company]. The US government rescued the company with loans. If they are not repaid, the public and the economy will have to bear the losses.

But for most of the companies that have gone bankrupt, the owners have lost a lot of money. They haven't been so carelessly as references to moral hazard suggest.

Incentive problems undeniably exist, particularly in compensation schemes. But more important were the fundamental miscalculations of risks.

swissinfo: UBS would like to shift away from investment banking. Is this still an option?

M.A.: That is completely unrealistic at the moment. Later however a sale could certainly be an option.

swissinfo: The Swiss financial sector is heavily dependent on what happens abroad. Isn't this very dangerous?

M.A.: Even though Switzerland is not a trouble spot, the situation is still critical. The Swiss financial sector can't be disconnected from international events. When it comes to bankruptcies, falling prices and investors afraid of risk, the premiums rise here too. Refinancing will be harder and more expensive.

swissinfo: What lessons does Switzerland need to learn to have a better warning system?

M.A.: Banks must have a solid capital base in order to cushion losses. As for the two big banks [UBS and Credit Suisse], they should implement minimal leverage of around 50 per cent.

If the banks make losses, they need to have time to look for new capital. Moreover, risk management must be improved. Generally, risks in the real estate market were underestimated, particularly when house prices did nothing but go up for years.

swissinfo: Politicians are saying that UBS will not go under and that there will not be a large impact on pensions from the US financial crisis. Isn't that just strategic optimism?

M.A.: I see no immediate danger for UBS. In terms of capitalisation they are still solidly on their feet. Significant new valuation adjustments are necessary however and they should obtain new capital to prevent any critical situations.

Pensions cannot be excluded from the impact of the crisis. Regardless of what happens in the financial markets, the second pillar [of Switzerland's pension scheme, paid by employers and employees] is very much affected. If the equity markets fail further, some pension funds will need to be rescued. Reorganisations are governed through the insured and employers. Basically, our pension system is not jeopardised.

swissinfo-interview: Renat Künzi and Gaby Ochsenbein

Drama in the financial industry

In March, US authorities facilitated the takeover of investment bank Bear Stearns by JPMorgan Chase.

At the beginning of September, the US government bailed out mortgage lenders Fannie Mae and Freddie Mac.

On Monday this week, US investment bank Lehman Brothers collapsed under a $600 billion mountain of debt. The same day, Bank of America took over rival Merrill Lynch.

On Wednesday, the US government bailed out the liquidity-challenged insurance giant AIG with $85 billion in available cash. It grew the total extended by the US government to $900 billion.

On Thursday, the first financial victim in Europe emerged. The largest British mortgage bank, Halifax Bank of Scotland, was taken over by rival Lloyds TSB.

On Friday, the US government drew up a rescue plan for at-risk securities and bad loans.

And on Saturday, the Bush administration asked Congress for $700 billion to bail out firms burdened with bad mortgage debt.

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Swiss banks

The operating results of Swiss banks dropped 3.1% during the second half of 2007 compared with the previous year.

They stand at around SFr70 billion ($63.7 billion).

In the first half of 2008, managed assets fell around 10% and at the end of June, were worth less than SFr5 trillion.

At the end of 2007, the value of assets under management in Switzerland around SFr5.4 trillion.

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