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The Swiss National Bank Scandal: What Does It Mean?
Posted by: Charles Sizemore (IP Logged)
Date: January 10, 2012 08:41AM



Many a powerful man in history has let his romantic life lead to his ruin. Julius Caesar had his Cleopatra, and Paris had his Helen of Troy. The Turkish Sultan Suleiman the Magnificent had his Roxelana, and the ancient Jewish King David had his Bathsheba. And of course, the American President Bill Clinton had his Monica Lewinsky (among others).

Is this how Suleiman felt?

We can now add Swiss National Bank Chairman Philipp Hildebrand to the list. Hildebrand abruptly resigned on Monday amidst a swirl of controversy surrounding currency trades made by his wife. One need not use their imagination to see how the spouse of a central banker might have unfair insider information. Kashya Hildebrand, the chairman’s wife, traded 400,000 Swiss francs in August, just before the bank undertook a major intervention in the currency markets to push down the value of the franc. We may never know if Mr. Hildebrand knew of his wife’s activities or if she rather cynically used her husband for material gain. Regardless, the scandal will no doubt be shocking to the Swiss, who have a reputation for honest administration.

Any news involving a scandal in the Swiss financial sector is bound to generate a lot of attention. Switzerland plays a unique role in the global financial system. Its reputation for stability, discretion, and integrity has helped to make Switzerland the largest “offshore” financial center with an estimated 35% of the world’s private wealth management business. In this article we’ll take a quick look at what the implications will be.

  1. The Swiss franc will actually rise. With Hildebrand at the top, the Swiss National Bank made a concerted effort to lower the value of the franc relative to the euro and other world currencies. With the Eurozone in crisis, money has been flowing to Switzerland for safety, which caused the franc to rise to levels that now punish Swiss exporters like Sizemore Investment Letter favorite Nestlé (NSRGY). With the scandal likely to create a distraction for the next several weeks, don’t expect much in the way of major policy action. And without active intervention, the franc will likely resume its rise.
  2. There will be no effect on Swiss banking privacy. Make no mistake, Swiss banking privacy has been under attack for decades, and cash-strapped governments in the United States and Europe have gotten increasingly aggressive in recent years in their attempts to piece the veil. Still, banking privacy is governed by treaties and the national government, not the Swiss National Bank. If anything, the incident may actually bolster banking secrecy; the release of Mr. Hildebrand’s financial affairs by a rogue employee was illegal under Swiss law and may be met with criminal prosecution. Banks will no doubt look for ways to prevent such leaks from occurring in the future.
Still, investors may want to use caution when trading the franc. Europe—shockingly—appears to slowly be getting its act together. The planned changes to the EU’s treaties concerning fiscal discipline are actually ahead of schedule. As crisis conditions in the Eurozone ease, the franc’s appeal as a safe haven will ease as well. And if Hildebrand’s successor proves to have teeth, the franc’s rise may prove to be brief.



Stocks Discussed: UBS, FXF, EWJ, NSRGY,
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