Raging At The Swiss

Will U.S. anger over Nazi gold lead to damaging sanctions?

Alan G. Hevesi had never been to Switzerland before. So during his May 1-8 visit to confer with banking and government officials about Swiss handling of Nazi gold and Holocaust victims' accounts, the New York City comptroller took in the sights at Interlaken in the Alps. He was delighted at the scenery and much taken with the "cordial and gracious" Swiss.

But back in his office in lower Manhattan, Hevesi has harsher words. A year ago, the comptroller sent the chief executives of Switzerland's three biggest banks a warning: Unless they cooperated in disclosing and settling the dormant accounts of Holocaust survivors and victims' heirs, New York City's pension funds might withdraw the $1 billion they have under Swiss management, sell their $47 million worth of shares in Swiss banks, and pull their $150 million in overnight deposits. Now, along with city and state officials all over the U.S., he is stepping up pressure on the banks. "The Swiss should be aware that there's a lot of activity in America to respond to their historical actions," says Hevesi.

GRASSROOTS. The publication on May 7 of a report by Commerce Under Secretary Stuart Eizenstat, accusing the Swiss of prolonging the war by buying German gold and of hiding money looted by the Nazis, boosted resolve in the U.S. to hold the banks and others accountable. Now, a grassroots movement toward financial sanctions against the banks is building. Taking their cues from Edgar Bronfman, president of the World Jewish Congress, politicians want the Swiss banks to identify every dormant account belonging to a Holocaust victim and return all assets to survivors or their heirs. They also want any profits the Swiss made from looted Nazi gold to be turned into a humanitarian fund to aid victims of Naziism. Estimates of the sums involved range as high as $7 billion.

Activists don't think the Swiss have been quick or cooperative enough in meeting these demands. Six states now have bills in their legislatures calling for divestment of state funds under management by Swiss banks. Some even call for a boycott of companies that do business with the Swiss. Chicago's city council is considering legislation to bar city money from any institution that has dealings with Switzerland, to be voted on by July. City officials believe that unless the Swiss move fast to make restitution, the bill is likely to pass.

Such sanctions could deliver a blow to Switzerland's financial services sector, which accounts for 12% of its economy. "If the bloom were off that rose, it would have a very significant impact for commerce in Switzerland," says Neil D. Levin, head of the New York State Commission on the Recovery of Holocaust Victims' Assets, created by Governor George E. Pataki on May 8. The Swiss know it, too. "So far we haven't seen any hard facts to make us uneasy about loss of customers, but, of course, it's always in the back of one's head," says Hans Konrad Zuest of Zurich's Cantrade Private Bank, which is wholly owned by Union Bank of Switzerland.

Although UBS, Credit Suisse, and Swiss Bank Corp. don't break out how much they have in U.S.-based assets, all three do brisk business in U.S. fund management, investment banking, commercial lending, project finance, and private banking--the Swiss specialty. Since the Big Three are estimated to manage more than $1 trillion worth of assets worldwide, large-scale divestment in the U.S. would not devastate them. Yet they are taking the prospect of a boycott seriously. Says Robin Monro-Davies, managing director of London-based credit-rating agency IBCA Ltd.: "The Swiss banks are out to grow in the States, and it would hurt them if they were to become pariahs there."

To protect their franchise, the banks' U.S. operations are bending over backwards to cooperate with investigators. Says a spokesman for the Big Three in New York: "They are very mindful of the potential negative impact that all these attacks could have on their business." Besides testifying at legislative hearings, bank officials brief employees and clients on progress at each bank in unearthing hidden war money.

The Swiss banks are responding at home, too. They have opened their records to an international commission headed by Paul A. Volcker, who has sent in teams of accountants from Arthur Andersen, Deloitte & Touche, and Price Waterhouse to look for Holocaust-era documents. And they will contribute $69 million toward a $184 million fund to aid Holocaust survivors and their families, the rest to come from government and industry.

Activists in the U.S. take credit for such progress. When UBS CEO Robert Studer initially balked at the restitution fund, suggesting that the money be used to settle class actions by survivors trying to collect from dormant funds, he caused an uproar in the U.S. Chastened, UBS now is eager that funds be distributed as soon as possible.

Nor is Credit Suisse dismissing the boycott threat as rhetoric. "I don't think it's just politics," says Bob O'Brien, managing director and head of corporate banking for the U.S. The bank has cooperated in opening its books and records to investigators. "We support a full exploration of the issues and are prepared to take full moral and financial responsibility for our actions," says O'Brien.

Ironically, the investigations could boomerang on some U.S. banks, too. Between 1939 and 1941, almost all Swiss bullion was stored in New York banks as the Swiss grew fearful that the Nazis would turn on them. In January, Levin, then New York bank superintendent, launched investigations of J.P. Morgan, Bank of New York, Bankers Trust, Chase Manhattan, and Citibank, all of which had correspondent relationships with Swiss banks during those years. Levin's new commission is determined to follow the trail of assets through New York to see whether any U.S. banks participated in handling Holocaust victims' dormant accounts. All the banks are cooperating fully with the examination.

WEAKENED. In addition, the Eizenstat report underscored that banks in many other neutral nations, including Sweden, Portugal, and Spain, helped finance the German war machine. Yet it's the Swiss banks that are taking the most heat--and are the most vulnerable. Switzerland's banking secrecy laws have long been at the heart of the country's financial success. With accountants traipsing through bank warehouses in search of documents, those laws may have been weakened. The CEOs of the Big Three banks have agreed to publish the names of holders of any dormant accounts--not only in Switzerland but in Israel, the U.S., and elsewhere in Europe.

The prospect that Swiss banks' vaunted secrecy might be cracked open cuts two ways. On the one hand, the Swiss improved their image by throwing their dealings with unsavory politicians and drug-money launderers into the cold light of day. So would opening their war-era accounts to full scrutiny. But it could threaten their $2 trillion private banking business, most of which is legitimate.

Ultimately, the Swiss have far more to gain than to lose by cooperating with the investigations into their involvement with Nazi gold. The resonance of the issue in the U.S. means that few states would stay behind after one passes any sanctions. "There is no end to the Holocaust," says Republican State Senator Robert W. Singer of New Jersey, co-sponsor of a bill that includes corporate sanctions against the Swiss. That emotion could shatter the reputation of Switzerland's banks--and its most lucrative industry.

Before it's here, it's on the Bloomberg Terminal.