Introduction: The Daily Bell is pleased to present this exclusive interview with Banker X, a well-respected financial observer. Banker X provides us with this interview anonymously so that he can speak frankly about the inner workings of the Swiss financial system. As someone who has held high posts in both the private and public banking fields throughout several decades, Banker X is in a great position to compare and contrast several kinds of Swiss banking models through several eras. We are certain our readership will find his comments enlightening and certainly food for thought.
Daily Bell: Thanks for being here, Mr. X.
Banker X: I'm pleased to respond to any questions you may have.
Daily Bell: You've had a ringside seat throughout the changing face of Swiss banking in the past 20 years. Yesterday Swiss banking was among the most profitable and well-run business models, and today, to hear many tell it, it is not worthy of survival. You may wish to save your bluntest and most intriguing comments and predictions for the end of this interview, but tell us now what went wrong and what's going to take to set it right.
Banker X: First of all, there exist today in Switzerland two kinds of banking – private banking and public — what I would call the Anglo Saxon model of banking. Things went wrong, as you put it, when the private business model began to evolve and public banking became a factor.
Daily Bell: You mean the various monetary and political changes in the 2000s no doubt.
Banker X: Switzerland is not the country it once was. Some may say the nation has changed for the better. For my part, I see the departure from the gold franc as a significant event. If the Swiss franc were still directly backed by gold, it would undoubtedly be the strongest and most sought after currency in the world.
Daily Bell: Surely the Swiss leadership understood that, yet, the change was made.
Banker X: The Swiss are a practical people. Banking is a mercenary activity. The Swiss leadership, both political and monetary, was led to believe that the trade-offs would be in Switzerland's favor, or at least in the favor of the Swiss leadership.
Daily Bell: Deals were struck.
Banker X: By trading in the gold backing for the Swiss franc, the Swiss leadership believed it would be better able to penetrate the world's marketplace with their greatest banks, UBS and Credit Suisse. These are the great Swiss public banks that utilize the tools and power of central banking to build world-spanning banking businesses catering to the fairly wealthy and aspiring wealth throughout the world.
Daily Bell: Couldn't they have built these banks without losing gold-backing?
Banker X: The franc is not the only issue. Several other things happened around 2000. Most importantly Switzerland decided to make it very easy for anyone from the EU to come and settle here. With an EU passport, Switzerland is unlocked for you. Think what this means in a country that can count its population in the few millions? Swiss culture is changing, and will eventually change drastically, and not everyone is happy about it.
Daily Bell: Culturally, the Swiss Germans have the most to lose.
Banker X: It is indeed the Swiss German culture that provides the bulwark for Switzerland's private banking establishment. The French Swiss have always been international minded and one could make the argument that it is the French Swiss who have been quite influential in the changes that Switzerland has made of late.
Daily Bell: These changes include a paper franc and open borders. What about this issue of private versus public banking. Can you expand?
Banker X: Private banking is banking for the wealthy. It encompasses opportunities in various sectors of the economy and includes various kinds of asset protection strategies and other forms of customized wealth enhancement. This is the kind of banking for which Switzerland is justifiably famous.
Daily Bell: Does it include some sort of regularized approach to tax avoidance?
Banker X: No, this is simply a stick used by Switzerland's enemies to beat her about the head. It is an absolute and perhaps deliberate misunderstanding of the Swiss model, at least as it pertains to private banking. Certainly, tax strategies are developed as part of a larger strategic orientation having to do with one's wealth. And the private and customized nature of the relationship lends itself to creating tax-advantaged approaches, but working within legal limits to create such strategies is much different than creating strategies that support outright tax avoidance.
Daily Bell: Does public banking in Switzerland deserve to come under attack?
Banker X: The Anglo-Saxon banking model emphasizes various mass-banking strategies for the wealthy and well-to-do, and these strategies over time tend to become fairly simplistic. What was once a sophisticated tax-advantaged strategy for a special situation becomes outright tax avoidance when applied to numerous accounts. Imagine an expensive meal served at the finest restaurant – and then imagine taking the same meal and serving it to hundreds or even thousands a day at a fast food outlet. Both the quality of the meal and the sophistication of its presentation would tend to degrade. This is exactly what happened when private banking practices were offered through UBS and other public Swiss banks. What was advice to support various tax-advantaged strategies became, in a simplistic and unsophisticated form, support for tax-avoidance.
Daily Bell: All right, then … if the private model worked so well, why did large Swiss banks abandon it?
Banker X: I will make a very blunt and controversial statement. I am led to believe there were deliberate behind-the-scenes assurances having to do with Switzerland's larger entrée into world banking.
Daily Bell: A quid pro quo?
Banker X: So much depends on size. Private banking is inherently a business of thousands while public banking is a business of hundreds of thousands and millions. The Swiss are no different than any other country in this regard. Greed often overwhelms common sense.
Daily Bell: Is that definitively what happened?
Banker X: Let me answer with a statement that may put it in context for you. The Swiss are experienced bankers, but there is no magic to the Swiss or to Swiss business. Basically Switzerland is a country with a population of fewer than 8 million. Their stance of neutrality during Europe's many wars is not necessarily a moral crusade so much as an accident of history – developed by their physical geography and the availability to provide neutral banking to European wealth. The modern variant of Swiss private banking expanded with the various communications revolutions of the 19th and 20th century. But it was never part of a larger entrepreneurial plan. It simply evolved.
Daily Bell: But is there a plan today?
Banker X: The Swiss have given up a good deal of what makes them unique. Why would the leadership acquiesce to this without anything in return?
Daily Bell: You imply, then, that Switzerland's elite sacrificed the country's individuality and competitive advantages for market share?
Banker X: It is a strong statement.
Daily Bell: If there was an agreement to trade the Swiss exception for greater access to Western markets, then why are the Swiss being pressured by those same forces today?
Banker X: A good question. Let me ask you one in return. What are the Chinese doing holding two trillion in rapidly depreciating dollar assets? It is a hard game, played roughly.
Daily Bell: So once the Swiss gave away what they had, they got perhaps a seven-year window to build several truly world-class, Western-style banking businesses.
Banker X: Again, I will answer with an observation. At one point UBS especially was very recently power of the first rank, an immensely powerful entity to be fielded by so small a country.
Daily Bell: And now?
Banker X: UBS is close to ruined, and barely saved. The Swiss and UBS will have to adapt to changed circumstances. The world has moved into a new era and the understandings that went before are no more.
Daily Bell: Not only that, but the Swiss are under pressure once again to further erode what is left of the original Swiss model. The world's leading Western powers are more aggressive and organized and demand a coordinated response.
Banker X: The Swiss response has not been one of morality, but one of pragmatism. It is always this way. The Swiss pioneered banking confidentiality for instance, but that was a response to a business need. Today, the reality has changed somewhat, and the Swiss will adapt as well. There is still a great demand for private banking and for bank confidentiality, so this will continue to be a good part of what the Swiss offer, but the leaders of the industry and the political leaders as well will seek to accommodate the pressures that they cannot avoid.
Daily Bell: The Swiss have been both apologetic and fairly combative when it comes to recent pressure from the international community.
Banker X: They've apologized when it was necessary. They've been combative because they have to be. They can't abandon the business model that has made the country wealthy. At the same time, the Swiss leadership has now given the international community assurances that in certain instances, the veil of bank secrecy will be punctured, on a case by case basis. This is not inconsistent with practices of private banking that have never encouraged criminality or other kinds of anti-social practices.
Daily Bell: What is the future for public banking, as you call it, in Switzerland?
Banker X: That's a good question. Many Swiss citizens derive affluence of some sort from Swiss banking and are quite angry at the bungling of the biggest Swiss banks. One would believe, however, based on the recent past, that the way forward for the Swiss lies in some sort of accommodation with the larger world community, and especially with the Anglo-Saxon banking establishment – regardless of past bruised feelings.
Daily Bell: You've mentioned this several times, and it's obvious that you are indicating a special relationship between the Swiss and the American and British establishment – no matter the tensions that have arisen.
Banker X: The Swiss will do what they need to do in order to maintain the businesses they've built over decades and even centuries. The banking business itself is a pragmatic business – which, at its topmost level, deals directly with the kinds of people involved in decision-making throughout the West. So the Swiss have a familiarity with the people who are demanding changes in Swiss business practices. In fact, some of those people may even be clients, ironically.
Daily Bell: These people seem to be holding Swiss public banks like UBS at least partially responsible for the global monetary crisis?
Banker X: Fundamentally, the global monetary crisis is a paper money crisis and has nothing to do with the industry of banking and everything to do with the fiat-money banking model. It is, in fact, a crisis of the Anglo-Saxon central banking model, which began in the 1600s and has proven exceptionally durable and successful – for those who lead the process anyway. Of course, the booms and busts produced by central banking waste a tremendous amount of resources and fool investors into thinking certain forms of industry are profitable when they are not. When the boom unwinds, tremendous money is lost – and blame begins anew. Since the political establishment has the biggest megaphone, the ability to explain the mechanism of the unwinding is defined by those who participate in the debacle and have a great stake in explaining it in terms that are favorable to them.
Daily Bell: It's true the central banking mechanism has not received much blame. Yet the larger Swiss banking model that seems to have invoked considerable controversy.
Banker X: It comes down to control. Regardless of previous assurances, the Swiss model is currently inconvenient for those who want a more transparent and more integrated financial community.
Daily Bell: Does the Swiss leadership believe it has been misled – or at least snookered?
Banker X: It is not coincidence in the eyes of the Swiss that much of the criticism being directed their way is offered by the British – whose United Kingdom includes numerous tax-advantaged regions of its own. In fact, it is seen more as a power struggle than an issue of financial regulation. It is, honestly, close to financial war right now. More and more Swiss banks prohibit their employees from visiting the United States, even for personal vacations, and some even prohibit their employees from making or taking calls to or from people in the United States.
Daily Bell: Could an American open a Swiss bank account today?
Banker X: Well, if you find your way to Switzerland these days looking to open an account as an American, you probably won't find a private bank willing to accept the account. However, if you show up as an informed citizen who also understands the way the world works and are looking to protect wealth and secure options for your family's future that otherwise may not be available at more advanced times of crisis, then you can still find a few banks willing to discuss the situation. It all comes down to the client and the individual risks pertaining to doing business with that client – regardless of their home country of origin.
Daily Bell: What is the future for banking in Switzerland?
Banker X: The private model has always worked well and has only come under attack because of the failure of the public model. The great public Swiss banks will contract and become more conservative in terms of services offered and the kinds customization they offer to preferred customers. But we also believe, after a period of contraction that the great Swiss banks will begin to grow again. For this reason there will be in some sense an increased tension between private and public banking and between the Swiss people and their leaders and the heads of their financial institutions.
Daily Bell: What does that mean for Switzerland itself?
Banker X: It's hard to say, for it depends on international events. If the current model begins to flounder and the communications technologies continue to make inroads into establishment methodologies, then the ancient Swiss model may reassert itself. If central banks and the larger banking community weather the storm, then the Swiss exception will likely become increasingly blurred – its greatest banks tending toward a public model that includes and emphasis on paper money and the products that take advantage of the larger business cycle.
Daily Bell: So Switzerland is at a kind of crossroads between public and private banking models?
Banker X: Perhaps. For the foreseeable future, perhaps several decades, the private models will continue to function and provide an exceptional level of service. As other options shrink, it is likely that Swiss private banks and the wealth and safety they offer will become even more in demand. But this scenario may disguise a schism beneath, because the Swiss are going to have an ongoing debate about the fundamental shape of their society. Are they going to be a country within the European Union or continue to go their own way, emphasizing the fortunate accidents of their country and their powerful financial industry? So … for the foreseeable future, Switzerland will continue to offer wonderful private banking services but the long-term outlook is cloudy.
Daily Bell: Are you predicting the eventual end of private Swiss banking?
Banker X: No, the services are too important. Not only that, but the next few years are going to be very good for private banking. The Swiss banking establishment as a whole, still values gold and silver highly and understands that these precious metals are a true store of value. The entire Swiss private banking franchise is built around appreciation of gold and silver, and no banking elite anywhere else understands money metals as do the Swiss.
Daily Bell: You indicated you would make some controversial predictions. Perhaps now is the time.
Banker X: I think, given the nature of the business cycle, we'll see gold put in a top over US$3,000 and silver over US$150 at least. We may not see these tops for several years, or even a half-decade or more. It depends on how much money the Western central banks are willing to throw at the economy and the nature and extent of the resultant price inflation. If we see a price hyperinflation, and we may see one, then money metals prices could rise even higher than I've predicted. Thus, the current epoch does not spell an end for Swiss banking but a challenging opportunity.
Daily Bell: Obviously, you're recommending that people continue to buy and hold gold and silver, in its physical form anyway.
Banker X: Toward the top of one of these extended metals bull-markets, you see paper products linked to metals begin to accumulate value aggressively. ETFs, futures, options and other paper products all have their place. Mining stocks and junior mining stocks especially generate outstanding values late in the cycle. I happen to believe that advances in technology will drive the junior mining industry much higher than most people think currently. Fortunes were made in the 1970s in these stocks, and as some of the newer and greener mining technology comes on-stream, you'll likely see an explosion of newly mined metal and a resultant explosion in both price and demand.
Daily Bell: Thank you for your insights, Banker X. It's been a pleasure speaking with you.
Banker X: Keep up the good work. The Daily Bell is one of my first looks in the morning.
Banker X obviously has a handle on what happens in Switzerland from a banking point of view. And we were pleased that he expanded, toward the end of his interview, on the traditional respect and appreciation for precious metals that remains a fundament of Swiss banking. The political leadership of Switzerland moved away from a gold-backed franc around the turn of the century, as he pointed out. But the conservative approach that is a Swiss hallmark remains in force, and has buoyed the Swiss franc at a time when other currencies are on their way down.
It is true that Switzerland, through its political process, has a great deal of exposure to developing-country debt, and this will doubtless weigh on the currency and the country's recovery from the current economic crisis. But these problems are not nearly so grave as those of countries such as Iceland, and much of Europe, where banks assumed debt far in excess of what would be considered prudent.
Swiss respect for gold and silver goes hand-in-hand with the banking industry itself, certainly the private banking industry. It does however, contrast with the efforts of Swiss public banks that are aggressively oriented around paper money – as he pointed out – and participate in the rise and fall of the larger economy.
It is also clear from Banker X's informed point-of-view that the traditional Swiss reverence for precious metals is more relevant than ever in a time of economic contraction and paper money devaluation via inflation. Going forward, the international community will probably have a greater rather than lesser reliance on gold and silver, despite the fiat-money paradigm that ruled in the 20th century.
This happens during every economic downturn. During the "Asian Contagion," for instance, Koreans were firmly informed by European banks that only gold would do for repayment purchases. The Asians learned the hard way just how Europe fundamentally values gold versus paper. The Swiss have a deep understanding of finance and the presence of money metals within the larger financial universe. The leadership misjudged when it made its public banking trade offs. Going forward, it is doubtful that the Swiss will make such misjudgments again. In fact, they are entering a monetary environment that they understand better than any other banking region – one that will cater to traditional strengths.
Here is a prediction: The Swiss private banking system will be more in demand in several years than ever before. From the standpoint of asset protection, service, sophistication and especially experience when it comes to precious metals, the Swiss remain a world-class banking environment – in our opinion the best in the world. We think that's a statement with which Banker X would concur.