Spotlight on a Tax Haven: Switzerland
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What do owners of mass sums of money and movie character Gordon Gekko have in common? They both use Swiss bank accounts to protect their enormous wealth and keep it secret from the public. In the second Wall Street movie, Gekko reveals that he has a $100 million trust set up in Switzerland. While this is just a part of a movie, we may never know just how close to real life it is.
Switzerland's banks have been operating on a hush-hush basis for centuries and have stored the savings of many of the world's wealthiest families. Switzerland is protected by what Nicholas Shaxson, author of Treasure Islands: Tax Havens and the Men Who Stole the World, calls "the profitable shield of neutrality".
The nation has been financing wars and countries for centuries by employing absolute secrecy in regards to its banking, both in deposits and loans. Catholic French kings received loans from Switzerland in the 1700's, a practice that would not be workable if word got out the kings were taking loans from Protestants. But according to Shaxson, the Swiss banking industry really took off during the Franco Prussian War in the 1870's and reaped even larger profits during and after World War I as wealthy individuals tried to dodge high taxes designed to pay for the war. However, profits from WWI were small change in comparison to the gains from the Second World War. The Swiss banking industry loaned Germany money when it ran low on funds and is allegedly continuing to hold onto the assets of Holocaust victim's descendants. Disputes over these funds continue to this day.
What's in the Bank for You?
Probably not much unless you are exceedingly wealthy or live in Switzerland. The average investor does not have enough assets to make a Swiss bank account worthwhile. But average investors can invest in the equity of Swiss banks.
The two largest banks by deposits in Switzerland are UBS (NYSE: UBS) and Credit Suisse (NYSE: CS). Both banks have a market capitalization of billions with UBS at $41.7 billion and Credit Suisse at $23.6 billion. The sheer size of these banks make them major players in the worldwide banking system and, as consequence, both have been adversely affected by the financial meltdown.
UBS has fallen to the $10 range after trading near the $50 level pre-recession. The stock fought back to test the $20 level in mid 2011 but fell back off after mounting Eurozone crisis concerns. The bank also trades at a slight discount to book and even pays a dividend, although it is a mere 1 percent annually. The payout looks stable at only about 14.8 percent of earnings and could be raised if the European debt situation improves.
Credit Suisse followed UBS downward during the initial crash but rose nearly all of the way back to its pre-crash $60 level by late 2009 before slowly declining back to its current price. The company is near the low end of its 52 week range and trades at 0.9X book value, a similar valuation to UBS. However, Credit Suisse pays a juicy 4.50% dividend in a single once yearly payment (last payment was in May). Without an earnings increase though, this dividend may be reduced since the payout ratio for the trailing twelve months was 167.2, an unsustainable rate long term.
A No PIIGS Way of Eurozone Investing
Some more international investors may point out that Switzerland does not actually use the Euro as currency. The country uses its own currency called the Swiss Franc and was hesitant to adopt the Euro because it wanted to avoid the oversight Euro members must allow. Switzerland is, however, part of the Eurozone in terms of where its earnings come from. A large portion of their earnings comes from other European countries, countries that do use the Euro.
In this way, Swiss banks offer a way to invest in a Eurozone recovery while reducing the risks. The worldwide networks of both companies provide an earnings safety net in the event of a Eurozone collapse. In addition, the dividend payments of each bank allow investors to collect dividends while they wait for recovery.
Swiss banks offer an interesting way to gain Eurozone exposure while balancing the risks. Unlike banks headquartered in distressed countries such as Bank of Ireland (NYSE: IRE) and National Bank of Greece (NYSE: NBG), UBS and Credit Suisse offer more protection from a meltdown with their location inside Switzerland and their worldwide presence. While a Euro collapse would harm Swiss banks, it may not obliterate them like it would do to banks in Greece and Ireland. Chances are that when you make your billions there still will be a place to store them. Far, far away from here.
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