DOES THE WORLD STILL NEED THE SWISS ? / THE WALL STREET JOURNAL OP EDITORIAL

OPINION EUROPE

AUGUST 27, 2009

Does the World Still Need the Swiss?

By HOLMAN W. JENKINS, JR.


Harry Lime gave a shout-out to the cuckoo clock but he might have mentioned Switzerland's other contribution to global culture, the secret numbered bank account, fortified by a 1934 law that made it a crime to betray an account holder.

We do mean "contribution." By accident or design, customers at the time included German Jews hiding their money from Nazi predators. Of course the Swiss didn't ask questions. Customers included more than a few Nazi predators too. That's the paradoxical virtue of Swiss banking secrecy, which has protected both greedy tax scofflaws and those merely trying to save something for the next generation when politicians are burning down the economy back home.

Last week's settlement between the IRS, the Swiss government and the giant bank UBS blows another hole in what had been a sacrosanct wall of discretion. The Swiss, after a bit of due process, will hand over names of 4,450 U.S. citizens whose secret accounts may hold as much as $18 billion in assets.

This follows a piecemeal chipping away in recent decades as the Swiss agreed to recognize the crimes of money laundering and insider trading, but the ultimate bulwark was always said to be Swiss refusal to join the world in treating tax evasion as a felony. Now that bulwark has begun to fray. Swiss secrecy in the future may be a privilege only for those with nothing to hide.

A decade ago, this column took a more sanguine view of this gradual erosion than we might today. Then, we noted that the world was moving toward democracy and rule of law. Governments were dismantling senseless regulations and tax rates so high they inhibited growth and collected less revenue than government would have collected with lower rates.

The world was becoming more like the Swiss, we said at the time—i.e., sane.

A similar judgment does not leap from our lip today, not after two years so reminiscent of the omen-filled early 1930s. We aren't predicting a feedback loop of crisis and chaos on a global scale, as the world suffered then. Such things are not impossible but neither are they likely, given humanity's craving for order. Still, today's IRS war on Swiss banking secrecy does not occur in a vacuum.

In 1934, Swiss politicians were legislating in response to specific events abroad: a Nazi law that made it a death-penalty crime to hold assets outside the country; a scandal stoked by French socialist politicians over Swiss bank accounts held by prominent citizens. The Swiss looked out and sawa world gone mad: bank failures, depression, militarism, fascism, communism. The new law was meant to buttress the world's confidence in the privacy and security of a Swiss bank account.

Today, the world is at least slightly deranged, with the possibility of getting very much worse. Democrats in Congress, in the face of every economic lesson, want to push marginal tax rates back up to confiscatory levels. AIG employees have been threatened with political lynching unless they "voluntarily" surrender income they were legally entitled to. Congressman Henry Waxman now wants to collect salary data on CEOs who don't support ObamaCare. On the macro level, meanwhile, the Swiss have always done a good business when residents of other countries see their governments making more commitments than they can possibly afford—exactly the situation in Washington today, as all the antecedents of an inflationary blowout are in place with only Obama man Ben Bernanke standing in the way.

No wonder UBS chief Oswald Grubel, even as he cleans up after his bank's reckless marketing (under prior management) of tax evasion to American citizens, still sees a bright future. Wealthy investors, he says, are on the hunt for havens of political and economic stability. On that score, he told the Journal, "Switzerland looks a lot better than the U.S., the U.K. or any other country."

Maybe so, but he and his clients must reckon with the dilemma exposed by the UBS fiasco. UBS kept large offices and staffs in the U.S. It maintained the world's largest trading floor in Stamford, Conn. This was unrealistic if the bank was simultaneously promising Swiss secrecy to its customers, for it made the bank a soft target for U.S. political and legal pressure.

The Swiss bank to trust in the future will be one whose assets and personnel are safely tucked behind Swiss mountains and a Swiss government adept at playing on the self-interest of other nations. UBS's sin was trying to market Swiss secrecy cheaply and widely—too cheaply and widely for others to tolerate. Let's hope we never need them again as we have in the past. But just in case, let's also hope the Swiss have learned to manage the franchise better.

Holman W. Jenkins, Jr. is a journalist, editorial writer and member of the Wall Street Journal Editorial Board. He writes the conservative-leaning[citation needed] weekly column, "Business World," that appears in the paper and online every Wednesday. Aside from writing for The Wall Street Journal, he has also written for Policy Review and National Review.

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