Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Lars Toomre's blog

Citadel Investment Group To Try To Raise $500 Million

The weekend edition of the Wall Street Journal on Saturday, December 6th contains a small article about how Citadel Investment Group Seeks to Raise $500 Million. The funds supposedly are going to be added to the $2 billion Citadel Tactical Trading fund, which is up more than 40% this year. This is a smaller fund to the much larger Kensington and Wellington funds and now includes Citadel's profitable market-making business.

The larger Kensington and Wellington funds have performed miserably this year. Supposedly they are down approximately 47% through the end of November 2008 and lost approximately 13% during the month of November alone. CEO Ken Griffin's plan apparently is to use the funds raised for the Citadel Tactical Trading fund to purchase approximately half of the combined equity portfolio from both of the larger multi-strategy funds.

According to the letter sent out from Citadel Investment Group about this limited offer, “Citadel Kensington and Citadel Wellington will experience reduction in the risk associated with their portfolios and enhanced liquidity from the transfer of a substantial portion of the Global Equities portfolio." Apparently, Citadel’s stock-picking team, with about 80 employees, has made money this year and will manage the equity positions of the Tactical Trading fund, the letter said.

Toomre Capital Markets LLC ("TCM") wonders though whether in this case Citadel Investment Group and Ken Griffin are talking out of both sides of their mouth. The two multi-strategy funds will be losing a substantial portion of the Global Equities portfolio, one that was supposedly profitable for 2008. Does that not mean that existing investors in the two funds will have more concentration in other strategies that contributed such miserable return numbers?

Vanity Fair: Profiles In Panic

In the January 2009 issue of Vanity Fair, reporter Michael Shnayerson has penned another excellent article, this time entitled Profiles in Panic. This article goes into some detail about how the downturn that intensified in September is affecting the Wall Street types who were living high on the hog in a gilded era. That era is very definitely changing as many are just happy to still have a job and not be one of the more 100,000 world-wide in financial services that have been laid off. It is a well written article definitely worth reading in its entirety.

In the middle of the article, the narrative turned to the sudden bankruptcy of Lehman Brothers. Perhaps no man better represented the excesses and hubris of this gilded era than the former number two at Lehman Brothers, President and COO Joe Gregory. From the article,

If the gilded age has come to an end this fall, surely Lehman’s demise—with its bankruptcy filing on that Monday morning of September l5, 2008—was the tipping point. It panicked the money markets, froze global credit, and sent stock prices spiraling down.

Lehman’s 31st floor—where Fuld and his top executives worked—was by all accounts a quiet place, especially by midafternoon, one managing director recalls dryly. Among Fuld’s loyalists, no one was more loyal than his number two, chief operating officer Joe Gregory, whose story, even more than Fuld’s, seems emblematic of the age now past. If Tom Wolfe were writing a sequel to The Bonfire of the Vanities, Gregory would be his man.

Gregory, 56, was a legend at Lehman—less for his business exploits than for his lifestyle. He had several homes: a principal residence in Lloyd Harbor, on Long Island’s North Shore; an oceanfront McMansion in Bridgehampton; a ski home in Manchester, Vermont; an apartment at 610 Park Avenue; and reportedly a house in Pennsylvania. “He had a kid who went to a small school in Pennsylvania,” a former senior colleague recalls. “Joe didn’t like the hotel, so he bought [a] house in town. It was probably only $500,000, but he paid for it so that, on the maybe two trips a year he took there, he’d have a nice place to stay. And then he had it redecorated!” The colleague says he heard it on good authority that Gregory’s after-tax expenses approached $15 million per year. That, he heard, was exclusive of mortgages. (Gregory’s lawyer declined to comment on e-mails from Vanity Fair.)

Lehman Brothers and Dick Fuld: Burning Down His House

In the event that the reader has not seen the excellent New York magazine article Burning Down The House written by Steve Fishman about the last months of Lehman Brothers, go read it now. The sub-title is "Is Lehman CEO Dick Fuld the true villain in the collapse of Wall Street, or is he being sacrificed for the sins of his peers?"

Toomre Capital Markets LLC ("TCM") believes that this is one of the better articles that explains some of what went on behind the scenes that led to the collapse of the fourth largest investment bank in September 2008. Lars Toomre at one point worked with or reported to some of the principal characters of this story. Several reporters have contacted Lars for information and background information on these characters. However, other than sharing some recollections about Bart McDade with the Wall Street Journal, Lars has declined. Rather TCM has written a number of articles about Lehman Brothers (including the very popular post Possible Bankruptcy for Joe Gregory of Lehman Brothers). An index of the various Lehman Brothers articles can be found here.

This article starts out with a description of a luncheon meeting that Dick Fuld had in June 2008 with a number of investment bankers that was arranged by the head of investment banking head Hugh Skip McGee. Two days earlier the investment bank had announced its first quarterly loss in fourteen years. The loss of $2.8 billion caused the stock to plummet again, 21 percent in a couple of days. The message to Dick Fuld was simple: "The board of directors is going to be under pressure. … It has to deliver a head to the street." Supposedly Dick Fuld shot back (as his veins on his neck popped), "I've given you fourteen years of earnings. I have one bad quarter. This is how you respond?" Yet the next day he canned both the then CFO Erin Callan and his long-time crony and then COO and President Joe Gregory.

Three months after that luncheon, Lehman Brothers on September 15 "filed for bankruptcy, the largest in history and a devastating blow to an already fragile financial system. Fuld became a symbol of failure, the face of arrogant, blindered, massively overleveraged Wall Street. Fuld is blamed for betting the farm on the way up, then stubbornly refusing to recognize the company’s dire straits on the way down. A few weeks after the bankruptcy, Congress summoned him to Washington for a deeply humiliating inquisition." Subsequently, "three sets of prosecutors launched investigations of Fuld and Lehman, probing whether shareholders had been duped."

The article goes on to make the point that in some sense Dick Fuld also is a victim. Apparently Fuld has been having trouble sleeping as he repeatedly goes over and tries to decipher the "mystery", his description of the firm's sudden collapse. "Why didn’t the government save Lehman the way it saved so many others, Bear Stearns and AIG and, just last week, Citigroup? Fuld and his allies can’t help but blame Paulson, whom he’d trusted and, until the end, viewed as an ally and even a friend. Yet Paulson, for reasons Fuld doesn’t yet understand, participated in making him the scapegoat." However, apparently "Mostly, he sits and replays Lehman’s calamitous end. 'What could I have done differently?' he thinks. 'In certain conversations, what should I have said, what could I have done?' How, he wonders, did it all go so disastrously wrong?"

Toomre Capital Markets LLC might suggest that Dick Fuld made the critical mistake of trusting too much his protégé and the firm's Mr. Inside Joe Gregory. TCM has previously written about Joe Gregory's decision to remove Michael Gelband in the spring of 2007 as the global head of the fixed-income division in the post Initial Reflections on Demise of Lehman Brothers. Apparently, Gregory did not want to cut back on the fixed-income's risk profile and may in fact have wanted to expand the risk to use the resulting profits to further fund the firm's aggressive overseas expansion.

UBS Poised To Name US Tax Dodgers

On Friday November 28th from London, The Financial Times is reporting UBS Poised To Name US Tax Dodgers in an article written by Haig Simonian. At the shareholder meeting held the day before to approve the latest round of capital raising for UBS, "The 2,395 investors gathered in a dingy suburban hall and heard for the first time that the world's biggest wealth manager looked poised to bow to US pressure and release the names of an unspecified number of US customers who may have committed tax fraud in squirrelling away their assets."

One has to wonder whether the "limited number" of such cases that were announced to have been identified (among the roughly 19,000 US citizens who held offshore accounts with the bank's Geneva, Zurich and Lugano offices) were the result of shall one say "illegal" activities, such as proceeds from drug transactions, bribery or other criminal enterprise behavior. Certainly the public revelation that mod and drug traffickers were hiding their money with UBS will create a great political uproar in the United States.

Perhaps the Swiss government hopes by releasing only the names of such known individuals who clearly committed crimes under both United States and Swiss law, there will be less pressure to expose the names of the other American account holders. From the story, "Peter Kurer, UBS chairman, gave no details, and officials stressed that the decision to transmit names to foreign authorities remained a government matter." But in noting the discovery of tax fraud "under both US and Swiss law", Mr. Kurer added: "Contrary to the idea conjured up in public discussions, bank secrecy is not absolutely valid. It is not there to protect cases of tax fraud." However, these comments suggest that there soon may be a settlement with the US authorities in their long-running investigations into alleged tax evasion in Switzerland.

PIK Your Own Poison

Toomre Capital Markets LLC (“TCM”) has been quite concerned about the future of mortgage finance in America. Back in July 2008, TCM created the post Fannie Mae, Freddie Mac and Future of Mortgage Finance. The key point of this post was the need for “the critical policy decision on the future of mortgage finance in the United States. TCM has highlighted this critical issue before. Until the late 1980s, the S&L's were the primary holders of mortgage debt. Commercial banks also have owned some mortgage debt (with significant capital haircuts). The relatively lower capital requirements and the ability to ‘turn’ the mortgage origination portfolios led to the rapid growth in securitization and the funding of mortgage debt through investors in the capital markets.”

Some four months later, the GSE’s have effectively been seized by the Federal government. Lehman Brothers has gone bankrupt. Merrill Lynch has agreed to be become part of Bank of America. And both Goldman Sachs and Morgan Stanley have become bank holding companies actively looking to attract deposits. As predicted in that July post, institutional investors have “gone on strike” against mortgage-backed securities (“MBS”). As a result, in the last week both residential and commercial mortgage backed securities have widened to extreme spreads against swap spreads. Those spreads narrowed considerably this week with the announcement that the Federal Reserve will be buying up to $100 billion in GSE debentures as well as $500 billion in agency pass-through securities.

Still, there is little discussion about the future of mortgage finance in America. In order for the American residential mortgage market to stabilize, there needs to be available financing for well-underwritten home mortgage loans. These purchases by the Federal Reserve are a temporary solution. There no longer is a savings and loan industry to provide the long-term holdings of MBS. The community and commercial banks are capital constrained and looking forward to greater losses on many types of loans as the credit crisis worsens becoming perhaps the worst recession since the Great Depression.

Part of the reason for the GSEs conservatorship was that it was deemed that their portfolios were too large for their capital bases, especially given projected future losses due to the decline in residential real estate prices. As mentioned above, the various traditional institutional investors who previously bought securitized MBS and their “sliced and diced derivates” such as CMOs, CDOs, and private pass-throughs are on a “buyer’s strike”. In many cases, these institutional investors also are trying to reduce their exposures to the mortgage sector.

Toomre Capital Markets LLC has long suspected that the securitization process will be key to answering this quandary about where longer-term mortgages should be financed in America. There is a critical problem that has been displayed in how that business was conducted prior to the current credit crisis. As a loan moved from the mortgage originator to the mortgage wholesaler to a warehouse facility to Wall Street and eventually on to institutional investors (blessed of course with a high-grade by one or more of the rating agencies), no one had a vested interest in the quality of the underlying mortgage loan. For several months now, it has been clearly understood that for the securitization process to restart, each part of the process will need to have some “skin in the game.”

Paul Volcker To Head Economic Recovery Advisory Board

On Wednesday November 26th 2008, President-elect Barack Obama announced that former Federal Reserve Chairman Paul Volcker will head up the newly formed President’s Economic Recovery Advisory Board. This panel will be comprised of officials from a variety of business sectors outside of government and will be tasked with providing Mr. Obama independent advice for how to jumpstart the economy and stabilize the financial markets. This new board will be modeled on the Foreign Intelligence Advisory Board that gave President Dwight Eisenhower independent opinions on intelligence issues. Austan Goolsbee, another key Obama adviser, will serve as the economic board's staff director and chief economist, Obama also announced.

Mr. Obama called the 81-year-old Paul Volcker a voice that he knows well and trusts. "Paul has been by my side throughout this campaign, providing a deep understanding of financial markets, extensive experience managing economic crises and keen insight into the global nature of this particular crisis," Obama said at his Chicago news conference announcing the appointment. This was the President-elect's third news conference in as many days focused on trying to demonstrate to the American electorate that he is trying to do something about the current credit crisis.

Paul Volcker was appointed as the Federal Reserve Chairman in 1979 and served two terms ending in 1987 when he was succeeded by Alan Greenspan. Volcker is famous for throttling the economy to crush inflation in the 1980s at one point raising short-term interest rates as high as twenty percent. According to the Wikipedia (which at times has inaccurate information, particularly regarding controversial public figures),

History Often Repeats Itself

Many people believe that history often repeats itself. Maybe the exact details are not the same, but the two time periods in question share many common characteristics. For example, many economists point to the parallels between the current economic crisis and the period of 1932-33 when President Hoover was in the tail end of his term and about to be succeeded by Franklin Roosevelt with his "New Deal" thoughts about change to get the economy functioning again. As a result of potential parallels between various points in time, some people study various historical events, people and time periods to gain a better understanding of how current events might be handled so as to prevent the mistakes of the past. The history of the financial markets is a case in point.

Economies have had periods of prosperity and contraction throughout all known history. Some of the contractions have been caused by excess supplies of some type of inventory; others have resulted from fears about the availability of credit or fears about the soundness of the banking system. Less frequently, the periods of contraction have been led by a complete collapse in the demand for products and services (like what appears to be happening during this credit crisis). Hence, it is often useful to have a better understanding of historical events and people.

Recently President-elect Barack Obama has been announcing the new members of this economic team, such as Timothy Geithner, Larry Summers and Paul Volcker. As a result, Toomre Capital Markets LLC ("TCM") has been reviewing just what did happen in the Korean crisis of 1997 (and which resulted in the in-coming Treasury Secretary Timothy Geithner rising to the attention of Robert Rubin and Larry Summers)? Or what were the forgotten details of Paul Volcker's "Saturday Night Massacre" in October of 1979 that inflicted large losses on many Wall Street houses as he suddenly raised short-term interest rates?

After the Crash: How Software Models Doomed the Markets

The above also is the title of a November 21st 2008 editorial by The Editors of Scientific American. The editorial's sub-title is "Overreliance on financial software crafted by physics and math PhDs helped to precipitate the Wall Street collapse". This editorial is well worth reading both today and in the months and years to come, as all parties consider the form and regulation of global financial markets after we get through the current credit crisis.

The editorial begins:

If Hollywood makes a movie about the worst financial crisis since the Great Depression, a basement room in a government building in Washington will serve as the setting for a key scene. There investment bankers from the largest institutions pleaded successfully with Securities and Exchange Commission (SEC) officials during a short meeting in 2004 to lift a rule specifying debt limits and capital reserves needed for a rainy day. This decision, a real event described in the New York Times, freed billions to invest in complex mortgage-backed securities and derivatives that helped to bring about the financial meltdown in September.

In the script, the next scene will be the one in which number-savvy specialists that Wall Street has come to know as quants consult with their superiors about implementing the regulatory change. These lapsed physicists and mathematical virtuosos were the ones who both invented these oblique securities and created software models that supposedly measured the risk a firm would incur by holding them in its portfolio. Without the formal requirement to maintain debt ceilings and capital reserves, the commission had freed these firms to police themselves using risk tools crafted by cadres of quants.

The staff at Toomre Capital Markets LLC has long admired this publication, partly since both Lars and Aldon started in technical fields before moving to Wall Street in the 1980s. Immediately before starting at Lehman Brothers, Lars Toomre was at M.I.T. and Aldon Hynes was at what then was one of the Mecca's of industry research, Bell Labs.

Where did we work in Lehman Brothers? We each started work in the mortgage department focusing on the very software that let Lehman Brothers and other investment banks slice and dice pools of assets into various classes (or tranches) of debt securities then known as Collateralized Mortgage Obligations ("CMOs") and now as Collateralized Debt Obligations ("CDOs"). We were two of the first quants hired by Lehman Brothers' fixed-income division working on some of the early software that this editorial targets!

United States Treasury Hopes to Stabalize Citigroup

On Monday November 24th 2008, news emerged that the United States government has taken a stake in Citigroup that will amount to about 8% dilution to current stockholders through the issuance of $27 billion in preferred stock that will initially have a coupon rate of 8.00%. The terms of the total package are still somewhat murky. However, apparently for some $300 billion in identified assets primarily tied to mortgage assets, there has been some deal on how the waterfall of losses from those assets will be allocated.

Apparently Citigroup will stand in the first loss position for about 12% of these mortgage-related assets, which apparently (according to the Citigroup CFO [via CNBC]) were picked because they generally duplicate those assets held by many other financial institutions. [If this news report from CNBC is indeed true, does not this report suggest that the direct regulators and Treasury Department expect that other institutions with similar assets will be pressing their regulators and the Treasury Department for a similar “bail-out:?]

Timothy Geithner is Choice As Secretary Treasury

Late on the afternoon of Friday November 21st 2008, NBC News and CNBC are reporting that New York Federal Reserve Bank President Timothy Geithner is the apparent selection as the Secretary of Treasury in the forthcoming President-elect Barack Obama administration. Toomre Capital Markets LLC ("TCM") has previously written positively of Mr. Geithner in the post Timothy Geithner: "Illigitimum non Carborundum" and applauds this selection.

As head of the New York Fed, Mr. Geithner has been in the thick of the regulatory response to the on-going credit crisis and working very closely with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson. His rumored competitor was former Treasury Secretary Larry Summers who subsequently served as the head of Harvard University before more recently moving to a hedge fund. Mr. Summers is well known for being one of the smartest economists involved in public policy.

TCM suspects that Mr. Summers will continue to offer his counsel to both President-elect Obama and now Timothy Geithner, so in a sense the American electorate will get the benefit of both of these economic policy officials. The rest of President-elect Obama's economic team is scheduled to be announced at a press conference to be held on Monday November 24th 2008.

Power Reverse Dual Currency Notes

While doing further investigation on what has been the root cause of the 30-year swap inversion, Lars Toomre came across an interesting article published by Reuters on Monday November 17th 2008. In that article,

In recent days, another type of hedging emerged, according to UBS analysts.

Whenever the dollar has weakened at or below 97 yen since late October, sellers of Power Reverse Dual Currency Notes (PRDCs) have been keen buyers of 30-year swaps, they said. PRDCs are structured so Japanese investors can obtain a higher yield of the dollar Libor curve but receive the cash flows in yen.

When the dollar breaks below 97 yen, it lengthens the duration of PRDCs and forces sellers to receive 30-year fixed-rate cash flows via 30-year swaps, UBS analysts said.

What the heck are Power Reverse Dual Currency Notes? Just from the name, it reminds Lars of the incredible swap that Bankers Trust sold to Proctor and Gamble and which caused such major losses during the 1994 increase in short-term interest rates.

Amazing Move in 30-Year and Swap Spreads

Lars Toomre of Toomre Capital Markets has been actively involved in the credit markets ever since he was moved from the investment banking division to the Lehman Brothers fixed-income trading floor late in 1983. As a result, he has witnessed many the upheavals in the bond markets including the 1986 rally due to $9 per barrel oil, the 1987 stock market crash, the S&L meltdown of 1990, the Asian currency crisis of 1997 and the Long-Term Capital Management ("LCTM") crisis of 1998. During that period, Lars never witnessed a day like Thursday, November 20th 2008.

The bench-mark 30-year Treasury bond is now trading at a yield of 3.43 percent down from 3.95 percent yesterday. This single-day move of 52 basis points and increase of nine points in price rivals the incredible moves in the flight to Treasuries (at the exclusion of all else) during the 1987 crash and the LTCM crisis. Just a week ago on Thursday, November 13th 2008, this same benchmark security was auctioned by the United States Treasury Department and the stop out rate on that auction was 4.30 percent. This particular Treasury bond ended the trading day on Tuesday with a yield of 4.13 percent.

However, as stunning as the rally in the bench-mark 30-year bond has been, the performance of the 30 year swap has been even more impressive. Unbelievably, the 30 year swap rate is now 2.84 percent. Apparently it has dropped approximately 80 basis points on the day and now trades at about 60 basis points rich to the benchmark 30-year Treasury security. Yes, the 30-year swap is now trading almost 60 basis point through Treasuries!!

Remember a swap spread is the yield differential between Treasury bonds and the fixed leg of a fixed-floating interest rate swap. Also, remember that any interest rate swap has to have a bank or other financial institution standing in the middle. With the world excessively concerned over counter-party risk, how is this spread at all-time negative spreads to United States guaranteed Treasury Bonds!?! Why are investors so willing to buy the 30-year swap with all of the attendant long-term credit issues at a lower yield than the underlying 30-year reference Treasury? This implies investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.

To gain a better sense of this stunning 30-year swap move, this swap closed last week at approximately -15 basis points. On Monday of this week, this swap was at approximately -19 basis points. On Tuesday, it closed at approximately -27 basis points and yesterday it closed at -33 basis points. Today it closed at -60 basis points!! Ten basis points in the 30-year Treasury are worth approximately 58 32nds of a point in price (or 1.8125% in price). Since Tuesday's close, the 30-year swap has moved from 3.80% to 2.84% or alternatively has appreciated approximately 17.4% in price!!! Simply amazing!!!

Top Traders Still Expect The Cash

As many readers of the Toomre Capital Markets LLC ("TCM") no doubt are aware, there is an on-going populist revolt on-going against the "fat cats" of Wall Street. The national politicians are responding to the deep-rooted anger of their constituents about how the $700 billion TARP program was urgently needed to "bail out" the major American global and investment banks. Hence, there is considerable rhetoric about "Main Street" vis-à-vis "Wall Street".

Much of the populist anger has centered on the large amount of pay and bonus compensation that the Wall Street investment bankers and traders receive, which is multiple times what professionals in other non-finance industries receive. The general thrust seems to be "What work exactly do these investment bankers do that is so special that these professionals are 'entitled' or 'deserve' to receive bonuses that are hundreds of thousands or even multiple millions of dollars?"

New York Attorney General Andrew Cuomo appears ready to proceed to beyond mere populist rhetoric. Using his authority under New York State's fraudulent conveyance legal code, he recently has written to each of the banks that have recently received capital infusions under the TARP program. He has demanded to receive information about executive compensation and how their 2008 bonus pools were calculated as well as information on the 2006 and 2007 bonus pools. He has ominously warned "We will have grave concerns if your expected bonus pool has increased in any way as a result of your receipt or expected receipt of taxpayer funds from TARP."

Partly as a result of this political pressure, the top seven executives at Goldman Sachs recently announced that each of them will be receiving no bonus at all for 2008. UBS quickly followed suit for its top executives as have Deutsche Bank AG and Barclays Plc subsequently. Other banking institutions receiving TARP funds are being pressured to likewise eliminate 2008 senior executive bonuses in the coming weeks.

With senior executive bonuses being eliminated or likely to be, the next challenge is what to do with the bonus pools for the lower levels of each of these banking institutions. Clearly, the bonus pools will shrink in size. However, the key question is by how much? Should they shrink to zero like many populists want? Or should the bonus pools be compressed only to the point where they can hope to retain their most important assets – their people? And if the latter is the objective, how much of a decline will be sufficient to prevent those "star" investment bankers and/or traders from moving to one of their competitors, a hedge fund or an asset manager?

Clearly, if Bank A pays zero percent of previous year's bonuses and its competitors pay about half of the previous year's amounts, the most talented personnel at Bank A will tend to move to competitors with better compensation, thereby hurting the future earnings prospects of Bank A. Likewise, if Bank A pays about half of the previous year's amounts and its competitors are at zero percent, Bank A will receive incredible political rhetoric and potentially legal inquiries by New York Attorney Andrew Cuomo. Hence, the board of directors and senior managements at each of these institutions are in a difficult position.

On Wednesday November 19th 2008, The Wall Street Journal printed the article Top Traders Still Expect the Cash written by Ann Davis. The sub-title of the story is "Wall Street CEOs Are Giving Up Pay, but Hotshots Are Another Story." The gist of this article is that there are a small group of Wall Street traders, primarily trading commodities, currencies and/or interest-rate products, who have had extremely profitable years and these traders expect to be compensated for excellent, if not career, years in terms of profitability.

UBS Global Wealth Chairman Raoul Weil Indicted

Toomre Capital Markets LLC ("TCM") wrote yesterday about the likely coming indictments in the scandal concerning American citizen tax-avoidance schemes facilitated by the Swiss banking giant UBS. A day later the first of what are likely to be the first of several indictments was revealed.

On Wednesday, November 12th 2008, according to court papers unsealed that day, Raoul Weil, 48, chairman of global wealth management at UBS in Zurich, was indicted Nov. 6 in Fort Lauderdale, Florida. Mr. Weil is the top global wealth management executive at UBS. The case is U.S. v. Weil, 08-60322, U.S. District Court for the Southern District of Florida (Fort Lauderdale). A copy of the indictment is here.

According to the indictment, between 2002 and 2007 Raoul Weil supervised the Swiss bank's overseas activities that serviced some 20,000 US customers. The indictment alleges that by using encrypted laptops and other counter-surveillance techniques, Mr. Weil and his co-conspirators helped US customers conceal around 20 billion dollars in assets from the IRS. Mr. Weil apparently instructed fellow Swiss bankers to increase their cross-border activities knowing that such activity meant bankers would be violating US law.

Toomre Capital Markets LLC believes that it is significant that this very senior executive was indicted with only one charge: conspiracy. The maximum punishment apparently is a fine of $250,000 and/or imprisonment for up to five years. TCM believes that this indictment will serve to squeeze Mr. Weil to reveal what he might know about the activities of yet further more senior executives at UBS.

NYT: Indictments Said to Be Possible in UBS Inquiry

Back in late May and early June 2008, Toomre Capital Markets LLC ("TCM") wrote about Bradley Birkenfeld and the UBS private banking business serving wealthy American clients. Mr. Birkenfeld, an American citizen based in Geneva, was an mid-level UBS private banker who subsequently pled guilty to helping American clients avoid tax liabilities through various tax-avoidance schemes.

Billionaire real-estate developer Igor M. Olenicoff was a client of Mr. Birkenfeld. In late 2007, he pled guilty to charges about avoiding to pay income taxes on some $200 million in assets hidden at one point with UBS in Switzerland. As a result of this guilty plea, federal prosecutors focused on Mr. Birkenfeld's role and secured an indictment of both him and his co-conspirator, a Mario Staggl, a Liechtenstein citizen and employee of a trust bank located in that secretive country. As part of the federal investigation, Martin Liechti, a top private banker at UBS overseeing the Americas region, was detained for a period by federal authorities in Florida as a material witness.

After Mr. Birkenfeld pled guilty in June, attention shifted to just what role UBS as an organization had in facilitating tax avoidance by American citizens. Over the summer, Congress held formal hearings about the matter. In the opening remarks by Senator Carl Levin on July 18th, he declared "UBS has an estimated 19,000 so-called “undeclared accounts” for U.S. citizens with an estimated $18 billion in assets that have been kept secret from the IRS." Partly as a result of such political and prosecutorial focus, UBS announced that "it would stop offering offshore banking services to clients in the United States". The investigations into UBS's private banking practices have continued through the summer and fall.

On Tuesday November 11th 2008, The New York Times is reporting more on the status of the various investigations. In an article entitled Indictments Said to Be Possible in UBS Inquiry written by Lynnley Browning, news emerges that "A federal investigation into UBS concerning its sale of offshore private banking services to wealthy Americans is concentrating on senior and midlevel executives and bankers, and could result in one or more indictments." Further, "Investigators are sifting through more than 70 names and related account details of American clients provided by UBS over the last few months to the Justice Department, which has passed the details to the Internal Revenue Service for further scrutiny. The Justice Department and the I.R.S. plan to build both civil and criminal tax-evasion cases against some of the clients."

The really interesting issue is how prosecutors will handle the criminal investigation of the bank itself. "The most severe outcomes could include an indictment, a deferred-prosecution agreement or a plea by UBS of wrongdoing. The Securities and Exchange Commission is also investigating the bank, which owns Paine Webber, over possible violations of securities laws." Apparently, UBS disclosed in third-quarter financial statement on Nov. 4 that "the investigations are ‘focused on the management supervision and control of the U.S. cross-border business and the practices at issue.’ "