Scandal in Basel

Clubby and conservative, Swiss bankers have been increasingly irked by the aggressive marketing methods of U.S. banks that have flocked to their country and heavily tapped the local money market. Thus Swiss moneymen reacted with scarcely concealed delight when the Basel subsidiary of the United California Bank suspended operations, a victim of the costliest banking scandal in Swiss history. The losses of the U.S. affiliate so far have been estimated at $40 million. But as state-appointed auditors worked to unravel the tangled affair last week, there was every possibility that the deficit could grow even larger.

Officials of the Los Angeles-based United California Bank, with assets in excess of $5 billion, have promised to make good the subsidiary's losses up to $40 million when the audit is completed, but that will take months. "It's the most complicated affair I have come across in my long career," says Frank L. King, chairman of the Los Angeles bank, itself a subsidiary of Western Bancorporation, a holding company that controls 23 banks.

Most of the losses developed from unauthorized speculation in the volatile world cocoa market, which some men associated with the bank reportedly tried to corner. Seven officers of the Basel bank have been arrested on charges of suspected fraud and mismanagement. Among them are Paul Erdman, the vice chairman and the only American in the group, and Alfred Kaltenbach, deputy chairman. Both were officers of the bank before it was bought by United California last year. Until then, it was known as the Salik Bank and had a reputation for involvement in speculative deals.

Coming so soon after the near foundering of Bernard Cornfeld's Investors Overseas Services Ltd., the mess is sure to heighten European misgivings about all U.S.-controlled financial institutions. More important, the bank's closing will doubtless influence the Swiss Senate, which begins debate this week on a bill to tighten the country's banking regulations. "The scandal can only help make the changes in the law more severe," says R.C. Harpham, First National City Bank's vice president in Switzerland.

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