Papers await next move in financial strategy

Making some wriggle room: Finance Minister Hans-Rudolf Merz in announcing proposed changes to the financial sector

A government plan to tax large bonuses and curb risks that a large bank’s failure could pose to the economy has left Swiss commentators wondering what comes next.

This content was published on April 29, 2010 minutes

Newspapers on Thursday generally agreed that the time was right for at least a “mini reform” in the financial sector but some wondered whether the country was playing a high-stakes poker game.

At a news conference in Bern on Wednesday, ministers announced their intentions of taxing bonuses of more than SFr2 million ($1.84 million) as company profit and not personnel costs, which are deductible.

Banks that also need state support to avoid collapsing would be subject to increased government scrutiny. Commentators said the financial sector should have expected the “encroachment”.

“A part of the economy itself is to blame for the mounting political pressure against excessive pay,” wrote the Neue Zürcher Zeitung.

Yet the Zurich-based paper still had to wonder: “Did the government allow itself to be blackmailed by a political party powerplay over the agreement with the US?”

“Did the government just advance what needed to be done anyway for economic stability or was forced to rush into things”?

US deal

Parliament will have the ultimate say over the proposals in the coming months but one thing is already clear: Switzerland’s political factions, particularly the centre-left Social Democratic Party, are using the issue as leverage to force the government to wade into the turbulent waters of executive-pay reform.

It works like this: Lawmakers will soon vote on a deal reached with the United States requiring big bank UBS to handover data on 4,450 accounts held by wealthy Americans out of sight of tax collectors. The settlement got UBS out of a potentially damaging court case involving the bank's alleged efforts to help US taxpayers hide their assets. A Swiss court blocked the handover until parliament can vote on it.

The government, of course, wants the deal done, saying that refusing to do so would drastically hurt Switzerland’s credibility and reputation as a country that respects agreements.

Newspapers suggested that the Social Democrats smell blood. If you want the deal to go through, the party has told the government, then you had better find a way to keep the financial sector from giving employees massive paychecks while the country suffers an economic recession the industry helped cause.

By linking the US deal with big bonuses, the left must be ready to walk the talk, the Geneva-based Le Temps newspaper said.

“The game isn’t without risks,” the paper wrote, adding that if the US deal fails, the burden to produce a new solution will be on those who shot it down.

“It will be necessary for those who subscribe to this logic… to demonstrate how that failure advances the cause they defend,” it said. “No one knows at this hour whether the promises made by the government will allow it to win the bet.”

Paper tiger

The NZZ said such a move was really quite shrewd of the Social Democrats – “for once”.

“The party wants to sell its ‘Yes’ vote for the highest possible price,” the paper said. “A priori, that is not reprehensible.”

The paper’s cross-town rival, the Tages-Anzeiger, agreed and said the move was par for the course.

“The Social Democrat approach is crude, but politics were never a noble business,” the paper wrote.

“There isn’t time for a comprehensive bill against bank risk but for a mini reform. The anchoring of special treatment for big banks into banking law would be worded in fewer lines.”

The paper said the reforms, even if passed, would not be cause for celebration just yet.

“If high bonuses must soon be taxed, the industry will find alternatives to line its managers’ pockets,” it cautioned, while saying that taking “steps to secure the risks of big banks, is still very significant”.

The Geneva-based Tribune de Genève was sceptical that the government’s steps would really amount to sweeping reform.

“Threatening like a paper tiger,” the paper said. “The federal government yesterday had empty words. Harmless.”

Tim Neville,

Bonus controversy

Following the financial crash of 2008 and the subsequent bailout of many global banks using taxpayers’ money, the issue of bonuses has been a hot potato in many countries.

In Switzerland, UBS was the only bank to receive financial aid from the state and this was paid back last year.

The Swiss financial regulator, Finma, has issued new rules on variable compensation that will come into force as of next year. These rules demand a link between compensation and long-term targets and more transparency.

UBS and Credit Suisse have both voluntarily introduced new compensation systems that defer part of bonus payments for three years, which is only paid out if targets are met.

UBS increased 2009 bonuses from SFr1.7 billion in 2008 to SFr2.9 billion last year. Some 60% of this will be deferred for high earning employees. The bank is expected to announce losses of around SFr2.7 billion compared with a SFr21 billion loss in 2008.

Credit Suisse will defer 40% of its SFr6.85 billion bonus pool for 2009. The bank reported a SFr6.7 billion profit last year compared to a SFr8.22 billion loss for 2008.

Bonuses on Wall Street rose 17% to more than $20 billion (SFr21.5 billion) in 2009, according to the New York State comptroller.

In Britain, troubled Royal Bank of Scotland set aside £1.3 billion (SFr2.1 billion) for bonuses despite making a £3.6 billion loss.

Both Britain and France last year introduced windfall bank bonus taxes to reclaim part of the bailout money to the public coffers.

Many executives have bowed to public and political pressure to forego 2009 bonuses or to increase the proportion of shares they received in relation to cash.

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