Category: Real Estate
How Mania Psychology Trumped Swiss Banking
Or, How a European Stereotype Went "Boom"
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| By Robert Folsom |
Published: Wed, 23 Apr 2008 17:00:00 ET |
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An old joke about European stereotypes goes like this --
In Heaven: the cooks are French,
the policemen are English,
the mechanics are German,
the lovers are Italian,
and the bankers are Swiss.
In Hell: the cooks are English,
the policemen are German,
the mechanics are French,
the lovers are Swiss,
and the bankers are Italian.
My space here is limited, so let's overlook the line about hellishly bad lovers and consider instead the reputation the Swiss enjoy as divinely gifted bankers. As always, there's a reason for the stereotype. Probably the most recognized case-in-point is UBS, the Swiss bank with $3 t-t-trillion under management. Yes, that makes it the world's largest manager of private wealth.
Although UBS has acquired other distinguished money management firms over the years (including Dillon Read, S.G. Warburg, and PaineWebber), its Swiss banking pedigree dates to 1747. The three keys which comprise the UBS logo stand for confidence, security, and discretion.
Conquer the Crash identifies the qualities that make a bank safe, and includes a list of banks for every state that meet the criteria. Click here for more.
Alas, UBS has recently had to report another dollar figure that stands out as "the largest" among lenders: namely, some $38 billion in total writedowns since the subprime debacle began in summer 2007. According to The New York Times, that cumulative loss has effectively "destroyed all the profit that the bank generated since 2004." The greater insult to injury for UBS shareholders is the 56% price decline the company's stock has suffered in the past 12 months.
All this and more was on the mind of some 4,200 of those shareholders, who assembled this week in Bern, Switzerland for UBS's annual shareholder meeting. Sentiment at the gathering was described as "raucous" (which to my mind suggests that if the crowd was anything but mostly Swiss, their emotional state may well have incited an all-out, chair-throwing spasm of violence). Shareholders received assurances that UBS's top executives and board would be repopulated by bankers with more conservative instincts; they were also told that the firm was very sorry and wouldn't do it anymore.
Assurances aside, the plight at UBS begs the question: How could a revered institution -- which represents a centuries-old tradition of "confidence, security, and discretion" in banking -- become a case study in irresponsible asset management?
Put simply, the answer is: Tradition is no match for psychology, especially mania psychology. Bob Prechter explains it this way:
"Ultimately, however, a mania and its aftermath have everyone for lunch.... Even among prudent professionals who remain in business, the aftermath is no kinder than was the mania itself."
And while Bob acknowledges the strong Swiss banking tradition, he also wrote this in Conquer the Crash: "Nevertheless, do not fall into the trap of choosing any Swiss bank just because it's Swiss. Today's largest Swiss banks, with their fat portfolios of derivatives [including securitized subprime debt], are at immense risk of failure if a depression occurs."
The analysis and forecasts in Conquer the Crash continue to unfold before our eyes. The book comes free with a Financial Forecast Service subscription, please click here for more information.
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