On Thursday January 22nd 2008, UBS announced that it is "finally" restructuring its Fixed-Income, Currencies and Commodities division ("FICC"). Part of the change involves completely closing down its real estate and securitization businesses as well as its exotic structured products operation. These changes are "part of a radical change that is needed to take FICC forward" announced Carsten Kengeter and Jeff Mayer, joint heads of FICC who arrived late in 2008.

As part of the restructuring, Sascha Prinz and David Sacco, global co-heads of the rates business, Chris Ryan, global head of credit, and Todd Morakis, global head of commodities, are leaving the bank. There are part of the changes announced by Jenker Johansson that "will enable us to leverage our core strengths while relying on lower risk and balance sheet utilization."

According to the memo announcing these changes, UBS is repositioning its investment bank, with the overriding strategy about emphasizing client business on "facilitation and flow," as well as providing strategic and tactical solutions with less reliance on the bank's balance sheet. Under the restructuring, the existing products areas in the FICC division are to be consolidated into three new business areas - macro, credit and the workout group.

On Wednesday January 14th 2009, Bloomberg News reports that HSBC Holding Plc and UBS AG may be held liable for as much as $3.2 billion of the losses linked to Bernie Madoff fraud scandal. Apparently there is quite the dispute over the duties of European financial custodians at funds in Luxembourg and Ireland. According to the article, "At stake is the image of the European fund industry, French Finance Minister Christine Lagarde wrote in a Jan. 12 letter to the European Commission and Luxembourg Prime Minister Jean- Claude Juncker. European funds’ assets grew 59 percent to 6.8 trillion euros ($9 trillion) over the past six years, partly because rules protecting investors made them attractive.

"'If they aren’t required to pay the money, then investor protection doesn’t mean anything and people might as well just invest in offshore funds,' said Isabelle Wekstein-Steg, a lawyer at Wan Avocats in Paris who is representing 10 French retail investors and two institutions that face Madoff-related losses at Luxembourg funds. 'UBS didn’t do its job of knowing at all times where the assets were, and the same with HSBC.'

"Custodians are charged with oversight of funds and they manage cash inflows and payments to investors. Those looking to recoup money would have to prove the banks failed to fulfill their duties, according to nine lawyers surveyed by Bloomberg News. HSBC has said it isn’t liable and UBS declined to comment on the issue."

Later, the article further explains, "Funds sold in the European Union to retail customers must follow rules on how money can be invested, called the Undertaking for Collective Investment in Transferable Securities, or UCITS. The rules also set out the responsibilities of custodian banks. Liability is determined under national laws in each member state. The EU said yesterday that it’s reviewing how rules that require EU-regulated mutual funds to safeguard clients’ assets are enforced around the 27-country bloc."

Toomre Capital Markets LLC ("TCM") suspects that HSBC and UBS will be held to be at least partially responsible for not fulfilling their custodial duties. Somewhat ironically then investors in following funds may have some additional deep pockets to recover their losses from: the $1.4 billion LuxAlpha Sicav-American Selection fund in Luxembourg (for which UBS is custodian), the $419 million Luxembourg Investment Fund-U.S. Equity Plus (for which UBS also is custodian), the $226 million Herald LUX-US Absolute Return Fund (for which HSBC is custodian) and Dublin-based $1.1 billion Thema International Fund Plc (HSBC custodian). The Thema and Herald funds were managed by Bank Medici AG, the Austrain bank founded by Sonja Kohn, whose clients invested approximately $3.2 billion in the Madoff fraud scandal.

Toomre Capital Markets LLC ("TCM") has previously written of the bubbling scandal regarding the Swiss banking giant UBS and its activities in helping American citizens participate in various tax-avoidance schemes. Such posts included Former UBS Private Banker To Plead Guilty, Wealthy Americans Under Scrutiny in UBS Case, UBS Global Wealth Chairman Raoul Weil Indicted, and UBS Poised To Name US Tax Dodgers.

On January 13th 2009, this story is back in the news. U.S. District Judge James Cohn declared that Raoul Weil, 49, the former chairman of the global wealth management division at UBS, was a fugitive from American justice. Apparently, Mr. Weil, the head of the division in which UBS private banker Bradley Birkenfeld once worked, did not surrender to United States judicial officials on charges of conspiring to help wealthy Americans hide assets from U.S. tax authorities. In the indictment unsealed in November 2008, Mr. Weil and other unidentified bankers conspired to help approximately 20,000 Americans hide as much as twenty billion of assets in Swiss bank accounts without declaring them to U.S. tax authorities and hence paying any income taxes generated from them.

This scandal stems from the December 2007 case in which Orange County, California billionaire Igor Olenicoff pled guilty to a charge of filing a false tax return and agreed to pay $52 million in back taxes, penalties and interest. An American based in Switzerland, Bradley Birkenfeld, worked for Raoul Weil (who then oversaw UBS cross-border private banking services, including those offered to wealthy American citizens) and was the private banker for Mr. Olenicoff. Mr. Birkenfeld himself then pled guilty to conspiring to tax avoidance charges and is rumored to be cooperating with American authorities.

Mr. Weil was based in Switzerland and was a member of UBS' executive board until he stepped down after the indictment was made public. Apparently, Switzerland does not consider tax-avoidance charges serious enough to merit the extradition of its citizens. Hence, there always has been some doubt about whether Mr. Weil might ever appear before United States judicial authorities. Mr. Weil's failure to appear, though, likely will increase the pressure on his now former employer UBS to release the complete list of American citizens who had cross-border private banking accounts in Switzerland before UBS unilaterally made the decision to close them last summer.

On Friday November 28th from London, The Financial Times is reporting UBS Poised To Name US Tax Dodgers in an article written by Haig Simonian. At the shareholder meeting held the day before to approve the latest round of capital raising for UBS, "The 2,395 investors gathered in a dingy suburban hall and heard for the first time that the world's biggest wealth manager looked poised to bow to US pressure and release the names of an unspecified number of US customers who may have committed tax fraud in squirrelling away their assets."

One has to wonder whether the "limited number" of such cases that were announced to have been identified (among the roughly 19,000 US citizens who held offshore accounts with the bank's Geneva, Zurich and Lugano offices) were the result of shall one say "illegal" activities, such as proceeds from drug transactions, bribery or other criminal enterprise behavior. Certainly the public revelation that mod and drug traffickers were hiding their money with UBS will create a great political uproar in the United States.

Perhaps the Swiss government hopes by releasing only the names of such known individuals who clearly committed crimes under both United States and Swiss law, there will be less pressure to expose the names of the other American account holders. From the story, "Peter Kurer, UBS chairman, gave no details, and officials stressed that the decision to transmit names to foreign authorities remained a government matter." But in noting the discovery of tax fraud "under both US and Swiss law", Mr. Kurer added: "Contrary to the idea conjured up in public discussions, bank secrecy is not absolutely valid. It is not there to protect cases of tax fraud." However, these comments suggest that there soon may be a settlement with the US authorities in their long-running investigations into alleged tax evasion in Switzerland.

Toomre Capital Markets LLC ("TCM") wrote yesterday about the likely coming indictments in the scandal concerning American citizen tax-avoidance schemes facilitated by the Swiss banking giant UBS. A day later the first of what are likely to be the first of several indictments was revealed.

On Wednesday, November 12th 2008, according to court papers unsealed that day, Raoul Weil, 48, chairman of global wealth management at UBS in Zurich, was indicted Nov. 6 in Fort Lauderdale, Florida. Mr. Weil is the top global wealth management executive at UBS. The case is U.S. v. Weil, 08-60322, U.S. District Court for the Southern District of Florida (Fort Lauderdale). A copy of the indictment is here.

According to the indictment, between 2002 and 2007 Raoul Weil supervised the Swiss bank's overseas activities that serviced some 20,000 US customers. The indictment alleges that by using encrypted laptops and other counter-surveillance techniques, Mr. Weil and his co-conspirators helped US customers conceal around 20 billion dollars in assets from the IRS. Mr. Weil apparently instructed fellow Swiss bankers to increase their cross-border activities knowing that such activity meant bankers would be violating US law.

Toomre Capital Markets LLC believes that it is significant that this very senior executive was indicted with only one charge: conspiracy. The maximum punishment apparently is a fine of $250,000 and/or imprisonment for up to five years. TCM believes that this indictment will serve to squeeze Mr. Weil to reveal what he might know about the activities of yet further more senior executives at UBS.

Back in late May and early June 2008, Toomre Capital Markets LLC ("TCM") wrote about Bradley Birkenfeld and the UBS private banking business serving wealthy American clients. Mr. Birkenfeld, an American citizen based in Geneva, was an mid-level UBS private banker who subsequently pled guilty to helping American clients avoid tax liabilities through various tax-avoidance schemes.

Billionaire real-estate developer Igor M. Olenicoff was a client of Mr. Birkenfeld. In late 2007, he pled guilty to charges about avoiding to pay income taxes on some $200 million in assets hidden at one point with UBS in Switzerland. As a result of this guilty plea, federal prosecutors focused on Mr. Birkenfeld's role and secured an indictment of both him and his co-conspirator, a Mario Staggl, a Liechtenstein citizen and employee of a trust bank located in that secretive country. As part of the federal investigation, Martin Liechti, a top private banker at UBS overseeing the Americas region, was detained for a period by federal authorities in Florida as a material witness.

After Mr. Birkenfeld pled guilty in June, attention shifted to just what role UBS as an organization had in facilitating tax avoidance by American citizens. Over the summer, Congress held formal hearings about the matter. In the opening remarks by Senator Carl Levin on July 18th, he declared "UBS has an estimated 19,000 so-called “undeclared accounts” for U.S. citizens with an estimated $18 billion in assets that have been kept secret from the IRS." Partly as a result of such political and prosecutorial focus, UBS announced that "it would stop offering offshore banking services to clients in the United States". The investigations into UBS's private banking practices have continued through the summer and fall.

On Tuesday November 11th 2008, The New York Times is reporting more on the status of the various investigations. In an article entitled Indictments Said to Be Possible in UBS Inquiry written by Lynnley Browning, news emerges that "A federal investigation into UBS concerning its sale of offshore private banking services to wealthy Americans is concentrating on senior and midlevel executives and bankers, and could result in one or more indictments." Further, "Investigators are sifting through more than 70 names and related account details of American clients provided by UBS over the last few months to the Justice Department, which has passed the details to the Internal Revenue Service for further scrutiny. The Justice Department and the I.R.S. plan to build both civil and criminal tax-evasion cases against some of the clients."

The really interesting issue is how prosecutors will handle the criminal investigation of the bank itself. "The most severe outcomes could include an indictment, a deferred-prosecution agreement or a plea by UBS of wrongdoing. The Securities and Exchange Commission is also investigating the bank, which owns Paine Webber, over possible violations of securities laws." Apparently, UBS disclosed in third-quarter financial statement on Nov. 4 that "the investigations are ‘focused on the management supervision and control of the U.S. cross-border business and the practices at issue.’ "

Late on Thursday June 5^th, Reuters ran a story indicating that the June 9^th court hearing for Bradley Birkenfeld, the former UBS private banker who is expected to plead guilty to tax conspiracy charges, has now been canceled. The cancelation apparently was requested by United States prosecutors and no new date has been set.

Toomre Capital Markets LLC ("TCM") has previously written on the Bradley Birkenfeld case here. TCM wonders whether this delay indicates that United States prosecutors have entered into settlement discussions with UBS that no doubt will lead to the release of the customer list of wealthy Americans who used the services of the UBS private banking division. Certainly, if that were the case, prosecutors would not want Mr. Birkenfeld publicly naming names until a settlement with UBS was completed and further investigations were at least started. TCM will be keenly watching for developments in this and associated cases over the coming weeks.

For publication on Friday, June 6^th 2008, The New York Times has produced an article by Lynnley Browning entitled Wealthy Americans Under Scrutiny in UBS Case. This article details some of the concerns that wealthy American clients of UBS are having much agitation ahead of the expected guilty plea on Monday, June 9^th 2008 of former-UBS private banker Bradley Birkenfeld to conspiring to helping a former American client, Igor Olenicoff, avoid paying taxes on some $200 million held in undeclared UBS accounts. Previous Toomre Capital Markets LLC ("TCM") posts on Bradley Birkenfeld and UBS can be found at this tag link.

The noteworthy fact that this article reveals "Under pressure from the authorities, UBS is considering whether to divulge the names of up to 20,000 of its well-heeled American clients, according to people close to the inquiry, a step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages. Federal investigators believe some of the clients may have used offshore accounts at UBS to hide as much as $20 billion in assets from the Internal Revenue Service. Doing so may have enabled these people to dodge at least $300 million in federal taxes on income from those assets, according to a government official connected with the investigation." [emphasis added]

If UBS were to reveal such a large list of wealthy Americans, there no doubt will be phenomenal anger directed against UBS and its CEO Marcel Rohner, who also just happens to be the head of the private banking arm when this supposed "wink and a nod" tax-avoidance activity supposedly occurred. Surely there will be considerable press coverage of this "tax scandal". There also no doubt will be considerable questioning by other UBS private banking clients about just what the value of supposed Swiss banking privacy truly is. This surely is to lead to some withdrawals and a likely decline in the UBS franchise value.

On the other hand, UBS could elect to fight the United States Justice Department. Of course, there likely then would be criminal charges against the institution itself to fight and the possible loss of United States banking and securities licenses. What the franchise value might be under such a scenario is anybody's guess. However, it is likely to be less than today's closing stock price. Would you want to own a deeply flawed investment banking franchise coupled with a disgraced private bank?

Toomre Capital Markets LLC suspects that this story is going to pick up a life of its own in coming days. With the American electorate entering the Presidential campaign season that is keenly focused on the economy and general tax policies, TCM strongly suspects that these rich Americans are about to be vilified as part of the contentious political season. UBS no doubt is going to receive plenty of bad publicity.

Earlier this week, Toomre Capital Markets LLC ("TCM") wrote about how UBS had advised current and former members of its private banking staff serving American clients to avoid traveling to the United States. The apparent concern was an indictment by American authorities against one of UBS's senior private banking executives, Bradley Birkenfeld, and a co-conspirator, Mario Staggl, a resident of Liechtenstein, a European principality where he is believed to remain at large. This tax-evasion case has led to on-going retention of Martin Liechti, who is UBS's Swiss-based head of international private banking for North and South America, as a "material witness."

Late on the afternoon of Thursday May 29^th 2008, The Wall Street Journal is reporting that Bradley Birkenfeld has apparently decided to change his plea to guilty. Apparently, in a federal court filing earlier in the day, a court clerk stated that Mr. Birkenfeld will change his plea at a hearing scheduled before U.S. District Judge William Zloch in Ft. Lauderdale, Florida on June 9th. He had previously pleaded not guilty.

The article continues "The former UBS banker is part of a larger probe that U.S. prosecutors are conducting into whether UBS advised wealthy American clients on ways to utilize complex corporate entities and off-shore locales to avoid paying U.S. taxes. The U.S. inquiry, which became public earlier this month, comes at a difficult time for UBS, which has written down some $38 billion in securities tied to subprime mortgage loans. A UBS spokesman wasn't immediately available to comment on Mr. Birkenfeld's court filing. Danny Onorato, a lawyer for Mr. Birkenfeld, said he could not discuss details of the agreement. A notice by the court clerk says the federal judge hearing the case 'will ask for a full confession' by Mr. Birkenfeld."

On Wednesday May 28^th 2008, the world awoke to the Financial Times (of London) headline UBS tells unit staff to avoid US visits. According to the FT, UBS has told current and former members of it private banking team responsible for rich US clients not to travel to the United States. Apparently, the reason for the move follows the recent indictment of one of the unit's former senior executives, Mr. Bradley Birkenfeld, who US authorities have accused of helping a billionaire client evade taxes. Perhaps the more genuine reason for the recommended travel restriction is that UBS may not yet want more negative publicity with the revelations of other wealthy Americans who sought to avoid taxes through illicit means arranged by UBS?

The FT article goes on to disclose that UBS has made legal counsel available to the more than 50 members of the private banking unit that had serviced American clients. UBS announced back in November 2007 that it had decided to wind down its cross-border private banking business with US customers, and many of these staff members have already left the private banking unit. Mr. Birkenfeld, an American citizen who has lived in Switzerland for some number of years was formerly part of the team headed by Mr. Martin Liechti, UBS' Swiss-based head of international private banking for North and South America. In April 2008, Mr. Liechti was detained by American authorities and remains in the United States as a "material witness."

Mr. Birkenfeld apparently was hired by Mr. Liechti because of his particularly close relationship with Igor Olenicoff, a US real estate tycoon, who reached a legal settlement with authorities last December. Apparently, because of his relationship with Mr. Olenicoff, Mr. Birkenfeld was able to negotiate a higher rate of remuneration than many of the other team members. Mr. Birkenfeld also apparently had only two major clients rather than the twenty or so serviced by other team members. The article concludes with information that Mr. Birkenfeld's relationship with the UBS private banking unit soured after UBS claimed that he not performed to expectations. Mr. Birkenfeld took legal action against UBS over his termination and then cooperated with the US authorities in their on-going investigations of UBS.

One has to wonder if the Swiss banking giant UBS can do anything right. Toomre Capital Markets LLC ("TCM") notes with interest that around noon EDT on Tuesday May 27^th 2008 that UBS is trading down about 14%. Supposedly this stock price decline in the common stock is tied to the second capital increase that UBS has launched in the last year.

Perhaps, though, the share decline might be related to the prospect of future losses tied to both real estate and auction rate securities? The Wall Street Journal article UBS Warns Of Losses Tied To Real Estate suggests that UBS's problems in the Capital Markets may continue. Apparently, the Swiss bank is likely to take further losses in its non-U.S. mortgage portfolios as well as some losses with the bank's Auction Rate Securities ("ARS") holdings. The total exposure to auction-rate securities, used mostly in municipal financing, increased to 11 billion Swiss francs ($10.7 billion) from six billion francs during the first quarter!!!!

Toomre Capital Markets LLC truly wonders whether UBS belongs in the global fixed-income business given its demonstrated incompetence. How the heck did the ARS portfolio rise by about 5 billion Swiss francs since March 31^st? While it is only TCM speculation, perhaps UBS decide it needed to bail out some of the holdings held by retail investors in the former Paine Webber retail broker system? The percentage of ARS held by retail investors increased sharply during 2007 and apparently many of such retail investors were sold ARS without a prospectus and the promise that ARS were as good as cash. Perhaps UBS decided it was better to buy such holdings back (at near par prices) rather than become exposed to many arbitration claims about their incompetence in educating their retail broker force to the risks and rewards of ARS holdings?

On Monday April 7^th 2008, news emerged that various capital markets regulators on both sides of the Atlantic Ocean are anticipating investigation(s) into whether UBS, the European bank worst hit by the credit crisis, has breached market disclosure regulations. As the TimesOnline reports, "The Swiss Federal Banking Commission ("SFBC") is preparing material on behalf of the Swiss Exchange ("SWX") and Securities and Exchange Commission ("SEC") ahead of an official investigation. A spokesman for the SFBC commented: "I can 'confirm that we are co-ordinating preparation for an investigation ... into whether announcements made by UBS are in line with stock exchange laws in Switzerland.'"

Toomre Capital Markets LLC ("TCM") might be a bit naïve. As one of the premier European global banks, UBS reported net profits on the order of $9 billion during 2005 and 2006; perhaps it was a bit less in 2005 and more in 2006. Did not someone (anyone???) in the current senior management team think that mark-downs of approximately $19 billion in one quarter just might be some market-moving information?

Assuming that the quarterly write-down was evenly distributed, did not any of these "managers" (worthy of some $10-25 million plus a year) think that the markets might be interested that UBS wrote down $6 plus billion each and every month of the first quarter? Let's see. This is really complicated math. Quarterly earnings were about $2.5 billion per month and write-downs were about $billion a month. Perhaps there might just be a "small" loss that exceeded its best year's quarterly earnings? No, the markets would not be interested at all this management teams seems to have thought.

In the April 3^rd 2008 edition of The Economist, there is an article entitled The Higher They Climb about Swiss banking giant UBS and its former Chairman Marcel Ospel. The article starts with the following paragraphs:

A YEAR ago Marcel Ospel, the chairman of UBS, and his chief executive, Peter Wuffli, surveyed the financial world from the very heights. As well as having the biggest wealth-management operation on the planet, their Swiss bank was a force to be reckoned with in big-league investment banking. It had turned in profits for 2006 of SFr12.3 billion ($9.8 billion). Mr Ospel was handsomely rewarded, to the tune of SFr26.6m.

It was an impressive vantage point for a poor boy from Basel, who had clawed his way up without the benefit of a university degree or the near-mandatory rank of officer in the Swiss military reserve. On his third marriage and having put the red Range Rovers and green Ferraris behind him, Mr Ospel had climbed at last to the top of his world.

Mr Ospel's ascent had been matched by the no less striking transformation of the lacklustre number-three bank in Switzerland, Swiss Bank Corporation (SBC), through merger and assimilation, into a global powerhouse. From 1996 Mr Ospel had presided over the hitching of SBC to such illustrious names as S.G. Warburg, a British merchant bank; Union Bank of Switzerland, then Switzerland's biggest; and two American brokers, PaineWebber and Dillon Read. Mr Ospel's ambition was paired with ruthlessness and ability. When he bought Warburg in 1995 he sacked 1,000 employees outright. His critics said integration would not work, but it did. Moreover, SBC, which changed its name to UBS in 1998, had a reputation for highly effective risk management. Its motto: if you don't understand the business, you don't do it. [Emphasis added]

On Sunday April 6^th 2008, NZZ am Sonntag is reporting that UBS will be preparing its investment banking division for a possible sale in the next two to three years. To help stabilize its investment banking unit, the bank apparently is planning on cutting up to 3,000 investment banking jobs, mainly in London and New York, while only a few jobs will be lost in Asia and Switzerland, Sonntag reported.

Toomre Capital Markets LLC ("TCM") wonders how much longer UBS will remain a "wanna be" broker/dealer in the global fixed-income capital markets business. Any firm that manages to lose close to $38 billion on an initial position of approximately $400 billion clearly has severe management issues. Equally clearly one has to wonder just how such a major bank allowed itself to get so far off-sides and whether it should be a trusted business partner at all given its extremely poor judgment and utter incompetence. $38 billion in write-downs is just unbelievable!! This week's coming report to the Swiss Central Bank on how the losses came about should make for quite interesting reading.

[UPDATE: The Australian has more information on the departure of UBS Chairman Marcel Ospel. In that article, "Ospel is the best banker in Switzerland by a mile," one UBS executive in London says. "But he was still the guy who sat on the risk committee while everything was ploughed into US mortgages. At its peak our balance sheet was $US 2.3 trillion. It got to a point where $US 400 billion of that was held in US mortgages. John Costas made those decisions and Ospel let him."

If this quote is indeed true, UBS and its former management are even more incompetent than TCM thought before. Why was the UBS investment bank carrying so many mortgages on its books? Were they simply trying to make a significant portion of their profits through a carry trade? Clearly a sense of balance was missing from this bank's collective decision making process.]

Late on Thursday April 3^rd 2008, news emerged that c/a>, a former president of troubled Swiss bank UBS AG, is pushing for a potential break-up of the bank, according to a letter Mr. Arnold and his London investment firm Olivant Advisers Ltd. in London have sent to UBS's board late on this date. Mr. Arnold served as president of UBS in 2001 before departing the bank after a dispute with current Chairman Marcel Ospel. This is a surprise move and is likely to accelerate changes at UBS, particularly regarding its investment banking division.

Luqman Arnold is quite a credible individual. After leaving UBS, Mr. Arnold joined U.K. lender Abbey National PLC as executive before overseeing the sale of Abbey to Spain's Banco Santander SA. As The Wall Street Journal details, today Mr. Arnold's firm Olivant Advisers Ltd. specializes in financial services.