UBS ex-CEO leads campaign to shake up bank

ZURICH (Reuters) - Pressure on beleaguered Swiss bank UBS AG (UBSN.VX) to break up intensified as activist investor and former chief executive Luqman Arnold demanded to shake up its governance and structure.

Arnold seeks to oust the newly named chairman, sell off asset management and the Brazilian division Pactual, and place the rest into a holding company with a view to selling investment banking and reducing the group to its wealth management rump.

"UBS's reputation has been comprehensively destroyed by proprietary trading activities totally divorced from any client business," Arnold said in a letter on Friday.

UBS shares rose 2.6 percent on the news as European banks were overall slightly weaker (.SX7P>.

Arnold's investment group, Olivant, said it controlled over 0.7 percent of UBS's capital. That would make him one of the top 10 investors in the world's largest wealth manager, the bank hardest-hit worldwide from the subprime crisis.

UBS has rejected calls for sweeping changes, saying its dual focus on investment banking and wealth management is sound.

The bank has already swept out management and seeks to raise a total of 34 billion Swiss francs ($33.5 billion) in capital, after writing down around $37 billion in bad investments made in a breakneck expansion in investment banking.

But in a letter sent to supervisory board member Sergio Marchionne -- currently chief executive of automaker Fiat SpA (FIA.MI) -- Arnold said the measures fall short. (here).

The group needs to sell more assets to raise capital and overhaul its corporate governance to make its board of directors non-executive rather than executive. Marchionne himself should become chairman to lead the changes, Arnold said in the letter.

"Arnold's logic for breaking up the bank cannot be faulted and events of the last year just confirm that. The core private banking franchise of UBS has been put under threat by the previous management's infatuation with investment banking," said analyst Peter Thorne at brokerage Helvea.

TABLES TURN

Arnold's return as an activist investor holds a twist of irony: he had served as CEO before being ousted in 2001 after a dispute over strategy with Chairman Marcel Ospel, who resigned this week due to the subprime catastrophe.

Arnold threw down the gauntlet to Ospel's replacement, in-house counsel Peter Kurer.

"His appointment as chairman perpetuates UBS's ineffective corporate governance and insular culture," Arnold said. "He lacks precisely those skills most relevant to the supervisory board at this time."

Arnold believes UBS should separate its investment bank from its private-client bank, put both in a holding company, and ultimately sell the investment bank. Arnold proposes selling the group's massive asset management arm, its Australasian business and its Brazilian arm Pactual to raise capital.

Arnold raised the specter of yet another capital increase, saying it was conceivable that the sums raised so far would not suffice to rebuild the group's base.

UBS did not immediately return calls seeking comment.

The 2001 ousting by UBS of Arnold, who is British, came just eight months after he had taken up his post, in what the bank at the time hailed as a move toward a more international management culture.

Arnold was replaced by Peter Wuffli, who in turn was sent packing in 2007. The group has long faced calls to split its wealth management and investment banking divisions, with some investors saying wealth management is what UBS does best.

After leaving UBS, Arnold became chief executive of Britain's Abbey National Plc and sold that company to Spain's Banco Santander SA (SAN.MC).

An Olivant spokesman in Zurich declined to comment.

For an analysis on a UBS breakup, click on ID:nL0351930

(Additional reporting by Jonathan Stempel; Editing by Paul Bolding and Erica Billingham)