The Super-Rich Are Spooked

By: John Rubino | Mon, Nov 2, 2009
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A couple of seemingly unrelated articles in Friday's Wall Street Journal illustrate how life is getting more complicated for the super-rich. First, it seems that the UBS debacle was not just a U.S./Swiss disagreement. Far from it. Now that the IRS has shown other high-tax countries how easy it is to pierce the veil of bank secrecy, the Europeans want their tax evaders too. And in Switzerland, theirs are a lot more numerous than ours.

Swiss Banks Lose European Clients

ZURICH -- While the spotlight has been on the aggressive drive by the U.S. government to flush tax dodgers out of Switzerland, bankers here are instead grappling with the loss of a much richer clientele: Europeans.

Americans have made up no more than 5% of Switzerland's $1.8 trillion offshore-banking business. But European clients are steadily coming clean, spooked by threats of a crackdown by their own governments.

Nonresident, or offshore, clients make up about a third of Switzerland's private-banking business, with just more than half of those coming from other European countries. According to KPMG, as much as 80% of the Europeans' money in Switzerland is undeclared. In all, KPMG reckons that tax evasion could represent up to 25% of Switzerland's total private-banking market.

This weekend, Swiss banking giant UBS AG will hand over the names of 500 suspected American tax dodgers to the Internal Revenue Service, the first of 4,450 names it will turn over as part of an August agreement between the U.S. and Swiss governments. That accord marked a historic breach of Switzerland's cherished bank secrecy, and prodded many Swiss banks to refuse to take American clients for fear of falling foul of U.S. laws.

Now, in the wake of the American crackdown, and Switzerland's cooperation, an exodus of European money is under way. This past week, Italian tax authorities raided local offices of Swiss banks, in what Swiss bankers regard as an attempt to scare tax dodgers. And new treaties Switzerland has signed with France and the U.K. make it easier for those countries to pursue information on suspected tax dodgers.

For Swiss banks, a fat business is slipping away. Citizens in Italy, Germany and France -- the big three tax-dodging nations -- stashed their money in Switzerland because of political unrest at home, high inflation and sky-high tax rates. They weren't always after high returns, and they complained little about performance and rarely visited their bankers, who typically had them sign discretionary mandates allowing the bank to act on their behalf. Higher fees on discretionary mandates mean such clients are twice as profitable as those who directly manage their accounts. Some bankers privately admit that the fees on undeclared money can be several times those on declared money.

Since around 2000, the bigger Swiss banks such as Credit Suisse Group, UBS, Julius Baer Group AG and Pictet & Cie have tried to diversify away from tax dodgers by opening branches in Italy, Germany and France and building big onshore businesses with these clients. They are also targeting new millionaires in Russia, the Middle East and Asia. With taxes low at home, investors in these countries are instead fleeing political instability. Indeed, Singapore, also courting these emerging-market millionaires, is now Switzerland's main offshore rival.

Some thoughts:

• It is only this weekend that the first batch of UBS client names will be turned over, and the rest will apparently be doled out a little at a time. So the ongoing revelations will be front-page news -- and a source of anxiety for account-holders and their advisors -- for at least another year.

• If U.S. clients hold one-twentieth of Swiss bank accounts and the IRS is getting 4,450 names from UBS alone, then Europe's high-tax countries, which account for about one-sixth of Swiss deposits, will want tens of thousands of names.

• Big Swiss banks opening branches in the countries from which they were trying to attract undeclared deposits exposed those banks to pressure from high-tax country regulators. This was a red flag which holders of undeclared accounts were stupid to ignore. UBS caved because it would rather be an international bank than a Swiss bank. So will its peers.

• The money now fleeing Switzerland has to go somewhere. But apparently it's not going is into ski chalets:

An Avalanche of Price Cuts

The hard sell has hit high-end ski areas.

"ANOTHER PRICE REDUCTION!" shrieked a recent email to Aspen, Colo., real-estate agents in bold red 48-point font, advertising the fact that a large home in the exclusive community of Starwood was now asking $9.95 million, 38% less than its original $15.95 million asking price. "CONTRARY TO RUMORS, 101 STEIN IS NOT UNDER CONTRACT!" screamed another, in lime-green size 24 font, about a ski-in, ski-out townhouse now asking $4.8 million, down from $7.4 million. But the biggest shocker, says Aspen broker Pamala Steadman, was the email reporting the markdown of a mansion on Red Mountain -- a prestigious area of a prestigious town -- to $19.9 million from $28 million.

Fall has long been considered a good time to hunt for good ski deals, from season passes to condominium rentals. But this year, the biggest discounting isn't just on lift tickets and goggles; it's on custom-built homes with views and slopeside condos with Jacuzzi tubs. "This is really unheard of," says Ms. Steadman. "Sellers are finally getting desperate."

Like the rest of the luxury real-estate market, elite ski areas initially held up better at the beginning of the housing downturn, seemingly immune from the rash of foreclosures sweeping across less-affluent communities. That was even more true at ski resorts, where land use restrictions limit inventory and buyers are often less reliant on credit. For a while, sellers just took their homes off the market.

But this summer the high-end finally hit a wall, because of the lack of financing for large "jumbo" mortgages as well as the fact that federal rescue measures only applied to lower-priced properties. In Sun Valley, Idaho, a favorite spot for CEOs, a 12,000-square-foot home on 10 acres with a guest house and six-stall barn was reduced for the second time this month to $7.9 million, more than half off its original asking price of $17.9 million.

Nowhere is the fire sale hotter than in Aspen, where four homes were sold in September of 2009 with a total value of $24.2 million, down from 11 homes sold in September 2007 with a total value of $71.8 million, according to MLS statistics from the Aspen Board of Realtors. "There are unbelievable bargains now," says Carol Dopkin, of Carol Dopkin Real Estate.

Ms. Dopkin is representing the house in Starwood that's down to $9.95 million. It is a top-to-bottom eight-year renovation of a 9,900-square-foot, seven-bedroom home on six acres with a four-stall barn and a guest house. Owner Debi Roblin Cook, who lives in Hawaii, says the current price is less than the amount she and her recently deceased husband put into the redo. "There's been some interest, but it's like people almost want you to give it away," she says, declining to say whether she would further reduce the price if the home fails to sell. She says she did get an offer a few years ago for $16 million which she now regrets rejecting.

More thoughts:

• This gap down in trophy property prices implies that the more-dollars-than-sense crowd isn't expecting a "V" shaped recovery in which vacation travel and asset prices spike back to 2007 levels. 50% reductions happen only where there's an absence of buyers. Sellers aren't seeing 20%-off low-ball offers; they're being met mostly with silence.

• Can the remaining banking havens like Panama and Singapore absorb a trillion-dollar inflow from newly-transparent Swiss banks? Probably not, and in any event that would put them next on the US/EU hit list. So a lot of money will have no choice but to move out of the shadows and become taxable.

• The focus on tax evasion misses the real point. No one really cares what happens to people who hide fortunes in order to avoid paying taxes. They -- and their bankers -- are criminals and deserve to be treated that way. But tax evasion isn't the only thing Swiss banks make possible; they also provide geographic diversification and privacy. That is, they've historically enabled clients to get wealth beyond the reach of corrupt and rapacious governments. They saved countless European fortunes from the Nazis during World War II, for instance, and to this day enable citizens of unstable countries to protect at least some of their wealth.

But now bank privacy is being systematically eliminated. Capital is being flushed out of hiding so it can be taxed today and, if some future government chooses, confiscated. The anxious rich -- and the rest of us -- are right to be spooked.




John Rubino

Author: John Rubino

John Rubino

John Rubino

John Rubino edits and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

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