Today's comment is by Bob Bauman JD, Legal Counsel and Senior Writer for The Sovereign Society.

Two months ago a U.S. District Court judge in Miami, Florida, authorized the U.S. Internal Revenue Service to go after information from Switzerland's largest bank, UBS.

In other words, the court gave its blessing for the IRS to go on a fishing expedition for supposed American tax evaders at UBS. In my opinion, the court was wrong to make this blanket assumption.

But then again, I have already stated my views on the invalidity of this U.S. court trying to override the Swiss laws.

In any case, the court order allowed the IRS to serve a summons on UBS. In short, the IRS wants information (including identities) on 19,000 Americans with UBS accounts in Switzerland. It's important to note that UBS has extensive operations and thousands of employees in the United States.

UBS May Have Hung Their American Clients Out to Dry... But Switzerland Isn't Budging

This court order came about because the UBS private bankers may have been stupid enough to advise wealthy Americans on how to evade taxes (at least according to the IRS).

The UBS situation was the subject of a series of noisy, demagogic anti-tax haven hearings in the Democrat-controlled U.S. Senate last month.

At the time I wrote: "The big question now is whether UBS, the supposed giant of Swiss banking, will have the guts to take a strong stand based on the Swiss bank secrecy laws and fight for the principle of its clients' financial privacy..."

"Even if UBS is willing to abandon its American customers to the IRS, I suspect that official Switzerland...[is] going to stand and fight for their basic bank secrecy laws -- laws that have been revised and updated to accommodate reasonable law enforcement requirements."

Well, UBS went beyond abandoning their American clients in one respect. They announced then and there that the Swiss-based UBS is abruptly ending its private banking services to Americans. In other words, if you're an American banking in Switzerland at UBS, you're out of luck.

In fact, thousands of Americans with UBS accounts were suddenly left high and dry. Our Swiss banking contacts tell us that other Swiss banks are refusing to accept UBS American clients seeking new banks there. They obviously don't want to inherit alleged UBS tax evasion problems with the IRS.

U.S. clients are especially nervous because the UBS statement said it would work with the U.S. government to identify the names of its clients who may have engaged in "tax fraud." (That phrase has special meaning in Swiss law because tax evasion per se is not a crime in Switzerland.)

You Can't Shake the Swiss Government

But as I predicted, while the spineless UBS bends, the Swiss government is standing firm. That official firmness may be cloaked in the diplomatic Swiss language (that has made Switzerland so famous) but it's still a firm stance nonetheless.

Example: This week the Swiss government informally asked the U.S. not to pressure UBS for client data located within the Alpine country.

Swiss State Secretary Michael Ambuehl told his U.S. counterparts that any request for client data must be decided by the Swiss government. It's a government issue because UBS would be breaching Swiss bank secrecy law by voluntarily revealing bank account records.

"I reaffirmed the offer by the Swiss government to cooperate constructively with the U.S.,'' Ambuehl said in his Bern office on Aug. 19.

"I underlined, however, that we expect them not to take unilateral steps against UBS to obtain information which is located in Switzerland as long as the agreed, bilateral legal cooperation is ongoing.''

This was undoubtedly a reference to the Swiss-U.S. mutual tax treaty and the mutual legal assistance treaty (MLAT) between the two countries.

Tax Evasion Isn't a Crime in Switzerland

"UBS is seeking to address these requests with both Swiss and U.S. government authorities within the legal framework for intergovernmental cooperation and assistance established between Switzerland and the U.S.,'' a UBS spokesman said in Zurich.

According to Swiss law, bank secrecy can only be lifted in connection with a criminal offense, such as tax fraud or money laundering.

But tax evasion isn't a crime in Switzerland. Should the finance ministry agree that UBS release the account details, then account holders will be informed before their details are handed over. This gives them the option to go to court to oppose the release, a Swiss official said.

Ambuehl said pressure from the U.S. and the European Union for Switzerland to amend bank secrecy laws hasn't increased. He also sees no need to revise them, because they include "strict internal rules and good external cooperation.''

No One Is Abandoning Swiss Policy Here

An alarmed Teodoro Cocca, formerly with Zurich University's Swiss Banking Institute said at the time of the UBS revelations: "This is a direct and coordinated attack on the heart of the Swiss financial system. This is a long-term threat that will not go away, and there is not too much Switzerland can do."

It appears that the professor was right about the gravity of the situation, but wrong to think that the Swiss government would supinely abandon the cornerstone of their banking success - strict bank secrecy.

There is a great deal the Swiss can do to defend their laws - and they are doing it.

By the way, it's worth noting that The Sovereign Society has NEVER recommended UBS. We have always thought they were too cavalier with their client's privacy.

Indeed for the last decade, we have advised U.S. depositors considering Swiss banks to avoid UBS AG and any other Swiss bank with U.S. based branches, affiliates or banking operations, other than a mere "representative office."

However, that doesn't mean you should abandon the country of Switzerland altogether. As you can see, Switzerland still has some of the strongest banking laws in the world - and the local Swiss government is even willing to take on American politicians to keep that bank secrecy their policy.

BOB BAUMAN, Legal Counsel

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99% of Mutual Funds are in the Red!

The other day, Morningstar published a shocking statistic - just 17 out of nearly 2,100 public mutual funds made investors money over the past year.

How's that for an "elite" performance?

While the folks who manage these funds kick back and enjoy another lavish vacation - possibly on your dime - you can fight back.

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Fasten Your Seatbelts: We're in for a Bumpy Ride!

I still like U.S. stocks compared to most foreign markets over the next 12 months.

In theory, a competitive currency makes American assets one of the best bargains in the world this year. Plus, a strengthening dollar is bullish for overall markets because it encourages cash-heavy global investors to assume more risk-taking.

But despite holding U.S. equities and several investment-grade corporate debt instruments, I'm still bracing for another round of credit related woes. Credit market indices continue to deteriorate this summer. A host of developments are revealing a fractured market that simply won't stabilize.

Credit spreads can tell a whole story. This matrix compares interest rates on riskier debt instruments vis-à-vis Treasury bonds. That picture here has been deteriorating since late May with high yield, investment grade, mortgage-backed and emerging market debt spreads all rising to their highest levels since the credit squeeze emerged.

What really irks me is that despite massive central bank liquidity injections into the financial systems since last December, interbank lending rates remain elevated. LIBOR, or overnight lending rates, are still too high. Right now, they're 81 basis points above the Federal Funds target 2% rate.

It's the same story in Europe. Banks aren't lending.

And the credit squeeze is not just affecting subprime or troubled borrowers. It's also affecting prime borrowers.

On Monday night I had dinner with one of the most successful real estate investors in Montreal. Despite his AAA-track record and bulging portfolio of income producing properties in Canada, this gentleman can't secure financing to buy distressed assets in the United States. Even hedge funds - which traditionally have been surrogate lenders to speculators - won't pony up the cash.

This tells me that we've got serious problems. If a prime borrower can't get funds to secure a bargain-basement real estate deal, then you've got to believe credit is tight. And tight credit is deflationary.

There's no doubt this has been a tough year for investors - the toughest I've had to navigate since 1998. Every time you think it's safe to put your toes back into the water, you get whipsawed by another panicked sell-off. Unless you've been over-weighted Treasury bonds and oil futures since mid-2007 the odds are pretty high you're losing money.

The market has not bottomed. Until signs of credit stress are finally alleviated investors should remain heavily parked in cash, alternative investments and reverse index funds. Another big shoe has yet to drop.

ERIC ROSEMAN, Investment Director

Introducing the Market that Doesn't Sleep -
It Just Takes "Cat Naps"

Like any market, you can't trade foreign currencies until someone in the world is available to buy and sell trades from you. In the currency market, this happens 24 hours a day...in different parts of world.

There is no starting bell to begin currency trading for the week. Instead, you know it's time to start trading when the action starts to pick up on your computer screen.

Every week, the currency market technically cranks up in Auckland, New Zealand on Sunday (which is their Monday).

On the other side of the world, trading generally starts around 2 p.m. EST on Sunday. First you'll see New Zealand traders placing their bets, then Australian traders join the action shortly after.

The trading doesn't really pick up speed until the Asian traders join the market several hours later. The Asian session begins in earnest around 7 p.m. EST Sunday night. However, even then, trading stays a bit thinner than usual. You can still trade but the volume isn't as high as during the usual business week.

The Asian session runs from 7 p.m. EST to about 4 a.m. EST. Then Asia passes the trading baton to London. The London session technically starts an hour before the Asian session ends - at 3 a.m. EST. The London traders are then open for business from 3 a.m. to around 12 noon EST.

Of course by then, New York is well into trading by the time London traders call it a day. There is a big overlap here because the U.S. session cranks up around 8 a.m. EST. So there is a good four hours where the London session and U.S. sessions are both in full swing. (The trading volumes are huge at this time and this is the time slot that many traders focus upon.)

Then the U.S. session winds down around 5 p.m. EST when the "international trading day" officially ends. At this point, trading still goes on but it's very thin until 7 p.m. EST when the Asian session is in full swing once again.

So welcome to the world's biggest market - the market that rarely sleeps. It just takes a quick nap between Friday around 4 p.m. (when most U.S. market makers close up shop for the week) through Sunday at around 2 pm EST.

SEAN HYMAN, Currency Analyst

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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER
Erika Nolan, Publisher • Bob Bauman, Legal Counsel
Kathlyn Von Rohr, Managing Editor • Eric Roseman, Investment Director
David Newman • Sean Hyman , Currency Analyst
Autumn Dodson, Email Marketing Manager


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