Did the U.S. Give Money To Swiss Banks?

Jan. 9, 2010

The unthinkable has become routine during the current global financial crisis. To date, if we can believe the published reports, the U.S. has spent $4 trillion to buttress its financial system, plus another $12.7 trillion to guarantee the financial system’s future stability.

The problem is that no one seems to know exactly where the money went. Did it go to U.S. banks? To pay bonuses? Buttress bank balance sheets? Fund acquisitions and new ventures? Or, did it go to bailout non-U.S. banks, which, in effect, control the financial destiny of entire nations?

There are a number of unsettling videotapes of testimonies from U.S. Federal Reserve officials who are either intentionally vague or un-cooperative and refuse to say or acknowledge where U.S. taxpayer money went.

These testimonies come from Elizabeth Coleman, Inspector General of the Federal Reserve, as well as Fed Vice Chairman Don Kohn, who testified before a Congressional committee. As these videos show, these two officials were unable or were not willing to provide answers to some direct questions posed by U.S. Representative Alan Grayson (D-Fla.)

What About Switzerland?
The issue of Switzerland is important because of the following: At the height of the crisis in 2008, at least one of the largest Swiss banks had risk exposures on their balance sheets which were greater than the total Swiss GDP, according to Andrew Kuritzkes, a partner at Oliver Wyman and head of the management consulting firm's public policy practice in North America.

Kuritzkes said this astounding risk exposure was due to the leverage which the two Swiss banks created in the course of issuing their own types of over-the-counter derivatives or by acting as counter-parties in some complex swaps. The point is that the banks owned more than the nation of Switzerland could call upon to pay if the derivative positions were called or went under.

Enter the U.S. and its missing $4 trillion to presumably buttress the U.S. financial system, plus another $12.7 trillion to guarantee the financial system. But in a global economy, it’s not clear where the U.S. financial system ends and the global inter-locking system of banks and other hybrid lending institutions begins.

Swiss-Style Leverage
Take the case of some highly-leveraged Swiss banks. According to the Wharton School of Business, UBS held a significant number of CDOs that were AAA-rated, however according to the complicated risk-adjustment ratios used to calculate capital ratios and risk exposures based on the Basel Accord, the banks received low risk weights. As a result, when the banks computed their capital ratios, they showed their risk-weighted assets were low, while their capital ratio was high.

Kuritzkes said “when you looked at the total size of the balance sheet, they had a tremendous amount of leverage because you're not risk-weighting these different asset buckets now.”

This absolute leverage was so high that the estimated losses at one of those big Swiss banks was greater than the GDP of the entire nation of Switzerland, according to Kuritzkes.

In effect, this meant that if just one of the Swiss banks failed, the Swiss national treasury would not have been able to bail them out. Switzerland could have gone bankrupt.

So the question is: Did any U.S. taxpayer money go to buttress any Swiss institutions? As of today, this number is unknown, but it is an appropriate question for people who believe in following the money.