New Import: "Too Big To Fail"

04/07/2010 05:12 am ET | Updated May 25, 2011

UBS is reorganizing its troubled US wealth management operations--turning three division into two. Zzzzzzz. I know this story packs enough punch to put Sominex out of business. But stay with me, because the UBS problems extend to the core of global financial reform.

An unnamed research analyst described the reorganization as follows: "Deckchairs. Titanic." And those two words got my attention. Given a trade dispute between the US and Switzerland--the Swiss won't rat out 4,450 tax cheats--UBS could lose its banking charter in the United States.

The Swiss are concerned. Rightfully so. Hans-Rudolf Merz, the President of Switzerland, speculated UBS could fail without US banking privileges. He estimated the cost of collapse at $250 billion. That's a huge number for the Swiss, over half their 2008 GDP of $488 billion.

Personally, I doubt failure is in the cards. The stakes are so large, our two countries will find a diplomatic solution. A theoretical collapse would hurt the Swiss more, as measured by GDP. Ours is $14.2 trillion. But UBS is a huge bank with a spaghetti tangle of financial relationships. A collapse would roil global capital markets. It would make Lehman's failure look like a rounding error.

Back to "Deckchairs. Titanic." Measured by assets, UBS is the sixth largest bank in the world as of November 2009. The others, in order, are:

  1. The Royal Bank of Scotland
  2. Deutsche Bank
  3. Barclays PLC
  4. BNP Paribas SA
  5. Credit Agricole SA

It's not until the number seven slot that we find a US bank: JP Morgan Chase. What's this mean?

I believe the Congressional rush to limit the size of US financial institutions is myopic. That we should be negotiating international standards, because US financial health is inextricably linked to international financial health. And last I looked, overseas banks don't take orders from Congress. That Chris Dodd's frustration with the pace of domestic reform is a joke.

We can't solve the issues of derivatives and leverage and short-sighted financiers until we talk to the rest of the world, right?

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