Big banks face break-up calls in subprime wake

By Thomas Atkins - Analysis

ZURICH (Reuters) - Battle lines are forming in banking that pit bigger-is-better against break-up advocates, and some of the largest conglomerates -- like subprime victims UBS (UBSN.VX) and Citigroup (C.N) -- could fall prey.

Such sprawling financial groups are facing pressure from regulators and shareholders to look back to the future and simplify, sell assets and focus on what they do well.

Big banks have long held that they profit from broad strategies in two ways: one business unit often feeds another, and diversified activities lessen earnings volatility.

But new risks have come to the fore with the subprime crisis which saw, for example, a handful of traders and managers at UBS's investment bank rack up over $37 billion in losses and damage the reputation of its prestigious wealth-management division, the world's largest.

"The supposed synergies of having investment banking and private banking in one company have been grossly overstated by the previous UBS management," said analyst Peter Thorne at brokerage Helvea.

"They have persistently ignored the large conglomerate discount that held back the UBS share price because of the presence of the risky investment bank," Thorne said.

UBS on Friday suddenly saw the emergence of a major shareholder who is leading a campaign to break up the bank into its parts and possibly sell them off, reducing the Swiss bank to its core wealth-management activities.

Luqman Arnold -- who in no small irony served briefly as UBS CEO in 2001 -- controls a 0.7 percent stake in the bank and launched the campaign by sending a letter to UBS management.

"We are not convinced that the ‘one bank' integrated business model ... will survive the damage inflicted by the proprietary trading losses and write-downs," Arnold wrote.

In a parallel case, Citigroup faced criticism from a former senior executive that the $166 billion megamerger he helped mastermind in 1998 and that made it the world's largest financial company was a mistake.

Neither stockholders nor customers nor employees of the firm have benefited from the deal, said John Reed, according to a report in the Financial Times.

Citigroup is reeling from the subprime crisis and is also facing calls to simplify after being forced to raise some $30 billion of capital and slash its dividend.

The bank has shed more than 6,000 jobs this year, and more cuts are widely expected, including in the investment bank.

"If you look at UBS and Citigroup here, there are similar problems here in terms of size and complexity," Arnold said in an interview on CNBC television.

SAVIOUR, TORMENTOR