Chaos and $37 billion meltdown at crisis hit USB bank where Royal Dutch Shell CFO Peter Voser is a director

THE WALL STREET JOURNAL: The Prizefight for UBS

EXTRACT: “It’s hard to make a case to someone wealthy that you can manage their money well when you’ve just lost $37 billion yourself”

Bank’s Ex-President Pushes for a Breakup; Rematch of 2001 Bout
By CARRICK MOLLENKAMP and KATHARINA BART
April 4, 2008; Page C1

A former president of UBS AG is pushing for a breakup of the banking giant, launching an activist-shareholder campaign, after UBS booked $37.7 billion in write-downs.
 
For British investor Luqman Arnold, the fight will mark a rematch with the bank that forced him out in 2001 after a dispute over governance and how much power he would have. Among Mr. Arnold’s proposals: UBS should legally separate its investment bank from its private-client bank and consider selling the investment bank; sell its asset-management business to raise money; and remove the chairman it named just Tuesday, according to a letter Mr. Arnold sent to UBS Thursday night.

The surprise attack from Mr. Arnold, chairman of London investment firm Olivant Advisers Ltd., promises to increase acrimony inside UBS, which has gutted its leadership since becoming one of the hardest-hit banks in the credit crisis.

A spokeswoman for UBS confirmed Friday receipt of a letter from Olivant and said the bank will respond in “due course” and in “appropriate form.”

UBS, created by the 1997 merger of Swiss Bank Corp. and Union Bank of Switzerland, has been under pressure from other shareholders to split off its investment bank. They blame the division for moving the traditionally conservative bank into trading complex mortgage securities that led to the write-downs and wiped out profits in 2007 and in the first quarter of this year.
 
Wealthy clients in UBS’s home market of Switzerland have been pulling money out of the private bank because they have become worried about the bank’s losses, Raoul Weil, chief executive of UBS’s private bank, said before Mr. Arnold sent his demands to the bank. Mr. Weil said UBS private-bank advisers had been reassuring clients, telling them of the announcement Tuesday of a rights issue to boost its capital by 15 billion Swiss francs, or about $15 billion, among other moves.

“It’s hard to make a case to someone wealthy that you can manage their money well when you’ve just lost $37 billion yourself,” said Dirk Hoffmann-Becking, an analyst at Bernstein Research in London.

Smaller Swiss rivals Julius Baer Holding AG and Vontobel Holding AG have said they have gained private-banking clients as UBS struggles.

Mr. Arnold’s firm, Olivant, had accumulated more than a 0.7% stake in UBS, valued at about $470 million, before sending its letter to UBS Vice Chairman Sergio Marchionne. The letter lays out Mr. Arnold’s suggestions and states that UBS “needs to act with urgency … as we remain cautious about the prospects for the U.S. housing market and the outlook for credit markets.”

Activist investors acquire stakes in companies and attempt to force them to make changes. If successful, they can stir up broader investor support and force companies to consider outright sales or the divestitures of ailing units. Last year, a London hedge fund sent a letter to ABN Amro Holding NV’s board chairman and chief executive demanding that the Dutch bank be broken up or sold. The letter ultimately helped to spark the $101 billion sale of ABN to a consortium of European banks.
 
UBS shares are down 56% in the past 52 weeks and 38% this year. In Zurich on Thursday, its stock fell 4.7% to 32.4 francs.

Mr. Arnold said in an interview that any sale of the investment bank, in a best-case scenario, wouldn’t happen until 2009, and it could take six to nine months to legally separate UBS.

UBS already has published its agenda for its April 23 annual meeting, and it isn’t likely that Mr. Arnold’s proposals will be officially considered. But his ideas could gain support and also accelerate the bank’s own changes. Actares, a lobbying group that votes on behalf of UBS shareholders who transfer their voting rights to it, already has been urging the bank to consider selling the investment bank to protect its private bank.

Mr. Arnold is pushing UBS to hire a nonexecutive as board chairman, faulting the candidate it selected this week, its in-house legal counsel, Peter Kurer. Outgoing Chairman Marcel Ospel, whose differences with Mr. Arnold led to Mr. Arnold’s departure in 2001, said this week he will step down at the bank’s annual meeting.

UBS officials have maintained that the bank can operate an integrated model, boosting business by moving clients from the investment bank to the private bank.
 
And UBS’s private bank’s expansion outside Switzerland in recent years is helping to cushion the blow of losing clients at home, with inflows from the Middle East and Asia compensating for the client departures in the first quarter of this year, the bank said. UBS counts on Switzerland for 13% of the assets it manages in its private bank, with the remainder coming from the rest of the world. Assets from wealthy clients in its home market totaled 281 billion francs at the end of 2007, with 2.134 trillion francs managed outside Switzerland.

In an effort to shield the rest of the bank, UBS has set up a special structure to hold its mortgage assets. The portfolio ultimately could be sold, but the bank likely would have to find an outside investor to take a stake in the structure.

Mr. Arnold, however, writes that the bank’s business of catering to wealthy clients will be tarnished by its subprime problems. “We are not convinced that the ‘one bank’ integrated business model that has served UBS well in the past will survive the damage inflicted by the proprietary trading losses and write-downs,” Mr. Arnold said.
 
Despite the bank’s belief that a $15 billion rights issue — the sale of stock typically to existing investors — will be enough capital for the bank when added to the 13 billion francs raised from Middle Eastern and Asian investors, Mr. Arnold said in his letter that fund raising might not be enough.

Mr. Arnold has worked in financial services since the 1970s. He got his start in banking at First National Bank in Dallas, before spending 10 years at Credit Suisse Group. He joined UBS in 1996 and was named president of UBS’s group executive board in April 2001, effectively making him the No. 2 behind Mr. Ospel. But a power struggle later that year between the two men led to Mr. Arnold’s departure.

After leaving UBS, Mr. Arnold joined United Kingdom lender Abbey National PLC as chief executive and then oversaw the sale of Abbey to Spain’s Banco Santander SA in 2004. Today, his company specializes in financial-services investments — it was one potential bidder for a stake in failed British mortgage lender Northern Rock PLC. But Mr. Arnold hasn’t previously been seen as an activist investor in European financial circles.

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