Daylife/Reuters Pictures used by permission

After the collapse of Lehman Brothers in September 2008, Switzerland’s largest bank was teetering. UBS, which was more than three times bigger than Lehman in terms of assets, had to write down some $50 billion during that tumultuous period.

Investors the world over breathed a sigh of relief on October 16 when the Swiss government rescued UBS. But unbeknownst to them at the time, the bank faced a potentially devastating crisis on a very different front.

One day after the bailout, top executives from UBS and Swiss regulators were summoned to a closed-door meeting in New York by U.S. officials who were conducting a wide-ranging tax fraud investigation that centered on the bank.

The UBS delegation, led by newly-appointed Group General Counsel Markus Diethelm, arrived armed with the results of an internal report highlighting instances of tax fraud within the bank, insiders told Reuters. The plan was simple: admit guilt, settle the case quickly and move on.

But Kevin Downing, the U.S. Department of Justice Tax Division Attorney who had been investigating UBS since the middle of 2008, chose that meeting to drop a bombshell: he wanted the bank to disclose names of U.S. tax evaders as a condition for a settlement.

That put UBS in the nightmarish position of either breaching nearly a century of Swiss bank secrecy or risking indictment in the United States…

Interviews with insiders and a review of documents reveal previously undisclosed details about how the sprawling tax case was resolved — at several points in the process, for example, Secretary of State Hillary Clinton was involved.

The confrontation also pushed UBS closer to the brink than is commonly realized. And while the bank ultimately defused the situation by coughing up $780 million and agreeing to hand over some client names, the damage to its huge and increasingly important wealth management operation still weighs heavily on the Swiss banking flagship.

RTFA. It might not make a great movie; but, it’s a hell of a tale for anyone who knows anything about international banking. Serious changes just beginning to be forced onto the old boys network – especially by the reinforcements brought into play by Obama.

Kudos to Kevin Downing getting it past the Cheney/Bush mafia.