An ill-judged currency bet has placed Swiss banking secrecy laws under the spotlight, say Philip Aldrick and Alexandra Williams.
On August 15 last year, Kashya Hildebrand, the wife of Switzerland's most senior central banker, should have been toasting the success of her eponymous Zurich art gallery's latest exhibition.
Bonsai Couture, an elaborate mingling of Japan (EUREX: FMJP.EX - news) 's miniature tree tradition with the fabrics and accessories of high fashion, was closing at the end of the week after a two-month run to make way for Lebanese artist Marwan Sahmarani. But instead, the former hedge fund manager was fretting about the value of the dollar.
Her decision that day to transfer Sfr400,000 (£270,000) of the family's money into US dollars would trigger the biggest scandal of her celebrated husband's gilded career, throw the country's controversial banking secrecy laws into the spotlight and expose an ugly political battle in the wealthy Alpine country.
The dollar trade would make the Hildebrands a Sfr75,000 profit in just two months a 19pc return but cost her husband, Philipp, the chairman of the Swiss National Bank (SNB (Swiss: SNBN.SW - news) ), far more in terms of reputational damage and, possibly, his job.
Despite repeated denials and being exonerated by two investigations, the currency deal has left the whiff of insider trading hanging in the air. The dollar's massive rise, which delivered the gain, can be traced to a single action the decision by Mr Hildebrand and the board of the SNB to set a ceiling for the Swiss franc, effectively pegging it against the euro, just three weeks after his wife placed her currency bet.
Central bankers are supposed to be above reproach because so many of those they regulate are not. Trust is their principle currency. In that respect, the scandal has weakened Mr Hildebrand, who is so widely admired that last year he was made deputy chairman of the global banking regulator, the Financial Stability Board.
Responding to the allegations on Thursday, he acknowledged as much, accepting his "mistake" and saying the trade "could bring my integrity into doubt" albeit insisting that he "always acted in line with the rules" and can still "look myself in the mirror".
Others were less forgiving. "I think Hildebrand has lost credibility over this issue and he will have to go, if not now then further down the line," Michael Hewson, an analyst at CMC Markets, said.
For one senior Swiss figure, Mr Hildebrand's departure would be a moment to savour. Christoph Blocher, a billionaire industrialist and firebrand ultra-nationalist politician, sparked the scandal by alerting the Swiss President, Micheline Calmy-Rey, to the trade in December last year.
Mr Blocher has been a fierce critic of Mr Hildebrand for the best part of two years and the leak of such sensitive private information to his Swiss People's Party (SVP) was a golden opportunity. Operating through official channels as well as Die Weltwoche , a right-wing weekly magazine with strong SVP sympathies, Mr Blocher ensured Mr Hildebrand was subjected to intense scrutiny.
On Friday, the SVP wasted no time in making its position clear. "It is unlawful and completely untenable that leaders of the SNB carry out currency actions in their private affairs. Philipp Hildebrand is no longer acceptable as chairman," it said.
But, in his dogged pursuit, Mr Blocher has himself committed one of Switzerland's cardinal sins. By accepting stolen account details, he willingly compromised the nation's precious banking secrecy laws at exactly the point they are under greatest strain.
Not one to miss an opening, Mr Hildebrand rounded on Mr Blocher, saying: "I regret that some circles, who regarded themselves as vehement champions of Switzerland's bank secrecy, now have no qualms about serious violations of that to pursue their political aims. They are damaging the interests of Switzerland."
In spite of efforts to paint himself as the victim of a smear campaign, Mr Hildebrand still has questions to answer.
His wife placed the trade 12 days after the SNB first intervened in the markets to support the Swiss franc, by cutting interest rates by half a percentage point and flooding the markets with the currency. A week later, on August 10, the SNB reinforced its liquidity actions, and two days after the trade on August 17 "intensified" its policies again, warning it would "take further measures".
On September 6, it did just that revisiting a policy unused since the 1970s by effectively pegging the currency to the euro at €1.20 (99p). In the 15 minutes following the announcement, the "Swissie" fell a record 9pc. The Hildebrands closed their position the following month, having made the kind of return that even the New York (Frankfurt: A0DKRK - news) hedge fund Moore Capital, where they worked and met, would have marvelled.
The nub of the problem is that the trade was effectively a play on central bank policy, making even Mr Hildebrand's "pillow talk" potentially incriminating.
At the time, the Swiss franc was soaring as investors sought safe havens to store their money. With the euro crisis escalating and the US at risk of default as politicians struggled to agree a new debt ceiling, gold was spiking, UK and German government bonds were in heavy demand, and the Swissie a traditional store of wealth was experiencing vast levels of interest.
In the five months to August, the Swiss franc appreciated almost 20pc severely endangering Switzerland's economy. Even Mr Blocher, who originally launched his attacks against Mr Hildebrand over interventions in 2009 and 2010 to depress the currency that cost the SNB Swf38bn, started calling for stronger action to protect the country's exporters.
"At the time, it was reasonable to suppose there would be a more robust response from the SNB against the euro," said Simon Derrick, head of currency strategy at BNY Mellon.
As many investors were taking positions that "shorted" the Swiss franc, according to currency experts, it was not surprising that Mrs Hildebrand, reprising her days an economist at Moore Capital, spotted an opportunity. "What motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap," she told Swiss television.
The question is whether she should have acted on her hunch at all, considering her husband's position. Given that "safe havens were in short supply", as Mr Derrick put it, there was little immediate prospect of the Swiss franc depreciating without central bank intervention.
According to two probes into the Hildebrands' actions by the Swiss government and SNB auditors PricewaterhouseCoopers (PwC), no rules were broken. Mrs Hildebrand did not tell her husband what she had done until the following day, when he informed the SNB board. Countering claims in Die Weltwoche that Mr Hildebrand placed the trades himself, he said: "It's very clear this transaction was ordered by my wife and there's an email to prove it."
However, it was only by keeping the trade alive while setting policy that the profit was made. Addressing that clear conflict, he said: "I only blame myself that I didn't reverse the transaction." In an attempt to draw a line under the affair, he donated the money to a mountain rescue charity and attempted to deflect some of the blame to his wife's independence.
"We married relatively late, and from the beginning our marriage has always been, how shall I put it? Well, let's say my wife is a strong personality," he said. His defenders point to the relatively small amount that was made as evidence that nothing nefarious took place. Mr Hildebrand, after all, earns Swf862,000. But even they accept that, at best, the couple were guilty of startling naivety.
Seen from another perspective, though, the scandal goes to the heart of perhaps the greatest Swiss controversy of all banking secrecy. The story emerged because a 39-year-old bank IT employee allegedly took three screen shots of the Hildebrands' account and leaked the information.
He passed it to Herman Lei, a lawyer associated with SVP, who then gave it to Mr Blocher. In allegedly doing so, the employee of Bank Sarasin in Zurich broke laws that date back to 1934. He has been sacked, arrested and faces up to three years in jail. By using the information, though, Mr Blocher has aligned himself with the very people he considers to be the enemies of Switzerland.
Banking secrecy is the foundation on which Switzerland's $2 trillion (£1.3 trillion) wealth management industry has been built. But international pressure, US persistence and whistleblowers like the Bank Sarasin worker have done more to dismantle it in the past three years than anything over the preceding century.
Even the $1.25bn settlement in 1998 between Swiss banks and Holocaust victims over $425m of looted Nazi gold the country bought from Germany in the Second World War did little to change the country's famous tradition of anonymous, numbered accounts.
Last Thursday, on the same day the SNB published its PwC probe, warrants were issued in the US for three Swiss bankers in the latest front in the global war against tax evasion. They were charged with allegedly helping wealthy Americans hide more than $1.2bn in secret accounts. They were not the first. Other Swiss bankers were arrested and jailed both last year and in 2010.
President Barack Obama has sent a clear message since taking office that banking secrecy will not be tolerated as long as it facilitates tax evasion. US action has been swift. In 2009, Washington launched an unprecedented case against UBS (NYSEArca: DJCI - news) for conspiring to defraud it of billions of dollars in taxes by helping tax evaders.
Weakened by massive sub-prime losses in the financial crisis, UBS did not have the financial muscle to put up a fight. The Swiss government, conscious of the pivotal role UBS has in the Swiss economy, eventually caved in as well. In a landmark deal in 2010, Switzerland turned over the names of 4,000 US account holders and paid a $780m fine. "Swiss bankers were horrified," said Andrew Watt, a specialist tax investigation consultant.
The US wasn't finished. In September last year, it threatened similar action against Credit Suisse (NYSEArca: CSMA - news) and nine smaller Swiss private banks. In the meantime, it established the Foreign Account Tax Compliance Act, which requires overseas banks to disclose the financial details of their US customers annually or pay a 30pc tax on profits from transactions of US securities. As a result, Swiss banks are opting out of private banking business in the US.
The US may have been at the forefront of the crackdown, but others have followed its lead. With political pressure mounting, the UK and Germany have both struck deals with the Swiss government to recover the proceeds of tax evasion.
The UK expects to receive £5bn between 2013 and 2015 under an agreement that will see the Swiss impose a one-off levy of up to 34pc on the estimated £125bn of UK funds held in Switzerland. The contents of the accounts would then be subject to annual withholding tax of up to 48pc on earned income.
For Switzerland, which will collect and hand over the tax, the crucial element of the deal was that banking secrecy will be preserved.
But with Western governments desperate to raise revenue to reduce their vast budget deficits, there is finally the unity of political will to crack down on the elite who use Switzerland to shelter their wealth.
"There has been a massive international attack on banking secrecy," Mr Watt said. "Momentum has gathered, and they've kept it going."
The scandal may yet claim Mr Hildebrand's scalp, but a victory for Mr Blocher would be pyrrhic if it proved to be another chip in the foundations of Switzerland's once-mighty principle of banking secrecy.
= The secret Swiss =
US allegations that Switzerland's biggest bank, UBS, was aiding 17,000 American clients to evade tax on $20bn (£12.9bn) of assets led the Swiss giant to pay $780m in 2009 to settle criminal charges. It admitted it fostered tax evasion, agreed to disclose 4,450 client names and ended its US cross-border banking business. Last year Credit Suisse Group (NYSE: CS - news) , Switzerland's second biggest bank, gave client account data to the Swiss tax authorities under a second US investigation. Last July, seven Credit Suisse bankers were indicted on a charge of conspiring to help US clients evade taxes through secret accounts.
In 2010, HSBC (LSE: HSBA.L - news) 's Swiss private bank lost details of 15,000 clients in a data theft. Accounts of about 3,000 British residents were passed to HM Revenue & Customs. The leak was one of a spate of data thefts that rocked private banking.
George Osborne announced an information-sharing deal with the Swiss last year that could raise £5bn by 2015. Under the deal, UK accounts held in Switzerland in May 2013 will be subject to a one-off levy that could be worth 34pc of the contents.