Wednesday, October 15, 2008; A07

ZURICH -- Of all the places in the world, this was supposed to be the safest to stash your wealth during times of calamity, war and financial panic.

But here in the heart of Zurich's financial district, anxious Swiss investors have been lining up to watch the stock tickers in front of the headquarters of UBS, a financial behemoth that has written off a stunning $43 billion in loser investments since 2007, more than any other bank in Europe.

"The idea that this could happen in Switzerland is unbelievable," said Klaus Stoeckli, 55, a food-products salesman who has withdrawn about $90,000 in investments from UBS, worried that its storied vaults might not be able to protect his money from the global credit crisis.

UBS executives say the bank is not in danger of failure. It has cut 7,000 jobs worldwide and is still trying to unload billions of dollars' worth of risky securities. But the bank has moved aggressively since December to reinforce its balance sheet with $25 billion in fresh private capital. It announced this month that it expects to report a small profit for the third quarter.

But the scare has forced Switzerland for the first time to contemplate the disaster that would result if one of its champion banks failed. It's been a shocking exercise for a country that has long cultivated a reputation for unsurpassed security -- and secrecy -- in its banking industry.

If UBS were to collapse -- as has already occurred with banks in Britain, Germany, France and Belgium -- it is unclear if the Swiss government could amass enough money to rescue it, analysts said. UBS has more than $1.75 trillion in assets worldwide, a figure about four times as large as Switzerland's gross domestic product.

"Swiss banks have always operated on the basis that they have an implicit guarantee of the state," said Manuel Ammann, director of the Swiss Institute of Banking and Finance in St. Gallen. "But these large banks impose substantial risks on the Swiss economy, simply because of their size."

UBS traces its roots to the mid-19th century. A combination of the former Union Bank of Switzerland and Swiss Bank Corp., it prospered during the bank-merger boom of the past two decades and manages more private wealth assets than any other financial institution in the world.

While UBS is the largest bank in Switzerland, it's not the only giant affected by the credit crisis whose sheer size looms over the Swiss economy. One block away on the Bahnhofstrasse, Zurich's main street for high finance and luxury shopping, is the headquarters of Credit Suisse, with $1.1 trillion in assets. Though Credit Suisse has also suffered in the past year, it has not been hit as hard as UBS, its longtime rival.

So far, the Swiss government has had little to say about the financial turmoil, adhering to the national tradition of silence and discretion when it comes to money matters.

On Oct. 6, the Swiss Federal Council, the executive body that runs the Swiss government, issued a statement saying it was "prepared to take appropriate measures should the need arise" and was "committed to ensuring the stability of the financial system." But it has said almost nothing about the travails of UBS, or commented on whether it has developed any contingency plans.

"One would like to have learned how a UBS would be saved, when it has become too big to be saved by little Switzerland alone," the Neue Zuercher Zeitung, a leading Swiss newspaper, wrote in an editorial. "It was once again crisis management à la Suisse: If it's serious, say nothing."

Roland Meier, a spokesman for the Swiss Finance Ministry, declined to comment for this article. He referred questions to the Swiss Banking Commission. A spokesman there, Tobias Lux, said the agency was trying to be "restrictive with the information we release," adding: "We've said what we can say."

Last week, the Swiss National Bank said it would cut interest rates by half a percent as part of a coordinated action with the Federal Reserve, the European Central Bank, the Bank of England and other central banks. Unlike most of its neighbors in Europe, however, Switzerland has not announced any measures to prop up banks with public money, either in the form of bailouts or direct capital investments.

Nor has it increased public protections for bank deposits; the maximum amount insured by the government is $26,500, or about one-tenth the level in the United States.

UBS got into trouble after it pursued an aggressive strategy to become more of a global player in investment banking, especially in Asia and on Wall Street. In recent years, it invested heavily in securities related to subprime mortgages in the United States, the risky loans that helped to trigger the credit crisis.

Those bets began to sour quickly late last year; UBS's stock price has fallen by half since January. The bank also has announced plans to cut an additional 2,000 jobs.

Analysts said UBS may have saved itself by moving quickly to secure an extra $25 billion in capital, starting in December when it announced an injection of about $9.75 billion from a government investment fund in Singapore and about $1.75 billion from an unnamed Middle East investor. The bank also conducted a new share offering. If the bank had waited until this summer, when capital markets began to freeze up, the effort could have proved too late, they said.

Although fears have eased somewhat about UBS, many Swiss remain deeply angry at the bank.

In February, about 6,500 people packed a hockey arena in Basel for a shareholders meeting and spent seven hours lambasting management. One shareholder, Walter Renz, accused UBS executives of criminal behavior for enriching themselves with bonuses and half-seriously threatened to press charges against them for bank robbery. "The bonuses are theft," he declared.

"You've lost sight and no longer have everything under control," added Jakob Truempi, a shareholder in his 50s who showed up to the bankers' meeting in a sweat shirt. He told Chairman Marcel Ospel that he should "face the consequences and go without compensation."

Two months later, Ospel quit. Presiding over his last shareholders' meeting in April, he was greeted by an angry shareholder who draped a wreath of Swiss sausages around his neck, suggesting Ospel might get hungry now that he was out of a job. UBS also replaced its chief executive and shook up its board of directors.

Hans Geiger, professor of banking at the University of Zurich, said UBS fell victim to misguided ambitions. Even though it already had the world's biggest wealth-management portfolio, it wanted more and tried to become a top investment bank on Wall Street as well, investing heavily in risky securities.

"It was just the wrong strategy for them to compete so aggressively in two different areas," Geiger said. "Roger Federer was the number-one tennis player in the world, but he wouldn't even think of trying to be number one in downhill skiing, too."

UBS has been working hard to win back the trust of investors and the Swiss public. In a rare example of openness and contrition for a Swiss bank, it made public a 55-page internal report outlining its mistakes. "We must fully restore our reputation as quickly as possible," Chairman Peter Kurer said in an Oct. 2 speech. "We want to be an accepted industry leader again."

Analysts and investors said that could take years.

Gabrielle Radler, a retired schoolteacher from Zurich, said she withdrew most of her deposits from UBS, saying that the bank has become too risky and too large. "If things really collapsed, I don't think Switzerland could do anything," she said. "The population is too small, and the bank is just too big."

Special correspondent Shannon Smiley in Berlin contributed to this report.