UBS tax probe seen bruising U.S. broker unit

By Joseph A. Giannone

NEW YORK (Reuters) - A federal probe into alleged tax evasion schemes at UBS AG (UBSN.VX) could do lasting damage to its U.S. wealth management unit, just as the hard-hit Swiss bank faces speculation it might sell this lucrative business.

UBS has been accused by U.S. authorities of helping rich Americans hide assets and evade taxes. Last month, UBS banker Bradley Birkenfeld pleaded guilty in federal court to helping UBS clients avoid U.S. reporting requirements. He also told investigators the bank holds $20 billion in undeclared accounts for U.S. taxpayers.

Allegations of widespread wrongdoing could dent the reputation of UBS, which has already emerged as the hardest hit global bank of the credit crunch, with more than $37 billion of mortgage and other losses. Clients may now think twice before handing over their money, analysts and bankers say.

"When an organization has these kinds of situations, it can't help but have an impact on the business and the way clients perceive the firm," said Aaron Dorr, Jefferies Putnam Lovell's head of asset management M&A. "The investors and consultants who drive asset flows will see this as a big challenge."

Eight years ago, UBS acquired PaineWebber Group for $12 billion at the peak of the tech stock bubble as part of a plan to use its dominance in Europe to take on Wall Street and capture some of the world's wealthiest market. UBS for years did just that and the brokerage arm expanded through takeovers.

Yet over the past year, UBS has mostly acquired a reputation for generating bad news -- from the failure of its Dillon Read Capital Management hedge fund venture and massive subprime mortgage losses to a long list of regulatory probes.

SHRINKING BALANCES

Credit setbacks have already hurt wealth management, UBS said. U.S. brokerage client assets declined to 773 billion Swiss francs in the first quarter from 917 billion francs and from 944 billion francs in the year earlier period.