April 4 (Bloomberg) -- Former UBS AG President Luqman Arnold called for a breakup of the biggest Swiss bank after about $38 billion of writedowns on debt securities erased more than half its market value in the past year.

Arnold, whose Olivant Advisers Ltd. holds 0.7 percent of Zurich-based UBS, made his proposals in a letter to board member Sergio Marchionne that was released today. UBS reported a 12 billion-Swiss franc ($11.9 billion) first-quarter loss on April 1 and said Chairman Marcel Ospel will leave.

UBS rose 3.3 percent in Swiss trading after Arnold said the bank should consider selling its asset-management unit to raise capital because a planned 15 billion-Swiss franc rights offer ``may not be sufficient.'' He recommended separating wealth management and business banking from the investment bank, and urged UBS to seek a banking expert to succeed Ospel, rather than appointing Peter Kurer, the company's top lawyer.

``We believe that a substantial recapture of shareholder value will be achievable,'' Arnold said in the letter. ``There is an urgent requirement for effective and relevant leadership of UBS's supervisory board'' as well as ``a clearer and more focused corporate strategy.''

Shares Underperform Rivals

UBS rose 1.06 francs to 33.46 francs, giving it a market value of 69.4 billion francs. UBS has fallen 36 percent this year, the second-worst performer on the 60-member Bloomberg Europe Banks and Financial Services Index. Credit Suisse Group, the No. 2 Swiss bank, has declined 17 percent after earning more than UBS for the first time in almost a decade in 2007.

UBS is worth 55 francs a share when its units are valued separately, Helvea SA analyst Peter Thorne said in a note today. It trades at 1.83 times book value, below the 2.23 times average of European peers, according to data compiled by Bloomberg.

The bank will review Arnold's letter and respond ``in due course and in an appropriate form,'' said Rebeca Garcia, a UBS spokeswoman.

Arnold, 57, said in an interview with Bloomberg Television that he hadn't yet spoken to UBS board members about his plans, and expects they will be open to meeting with him. He ruled himself out as a potential candidate for chairman, saying in a separate interview that from his own experience ``it would be easier for a Swiss national'' to reorganize the bank.

``Given his former insider status we believe the letter will have an impact,'' Derek De Vries, an analyst at Merrill Lynch & Co., said in a note today. He rates the bank ``neutral.'' ``We think the breakup value will once again come into focus.''

`Fundamental Overhaul'

Before last year's writedowns, the company typically generated just more than half of pretax profit from wealth management and business banking, 40 percent from the investment bank and most of the remainder from asset management.

UBS, the world's largest money manager, said on April 1 that it will replenish capital with the rights offer, after already raising 13 billion francs from investors in Singapore and the Middle East. The bank will write down $19 billion on debt securities in the first quarter, bringing the total to almost $38 billion since the third quarter of 2007. UBS piled up net losses of more than 25 billion francs during the period.

UBS needs ``a fundamental overhaul of risk discipline and more open and transparent communication,'' both internally and with the market, said Arnold.

He left the bank in 2001 over a dispute on management responsibility and corporate governance after Ospel, as chairman, took a leading role in talks with Swissair Group, the Swiss flagship carrier that filed for bankruptcy protection.

Subprime Losses

After leaving UBS, Arnold became chief executive officer of London-based Abbey National Plc in 2002. He returned the second- largest U.K. mortgage lender to its consumer-banking origins after a failed foray into corporate lending resulted in two annual losses. He sold Abbey to Banco Santander SA in 2004. Last year Olivant made a bid, which it later withdrew, for Northern Rock Plc, the mortgage lender bailed out by the Bank of England.

Rising U.S. mortgage defaults have caused about $232 billion in credit losses and writedowns at financial companies worldwide. The near collapse of New York-based Bear Stearns Cos., the fifth- largest U.S. securities firm, and its takeover by JPMorgan Chase & Co. heightened concern that some of the largest financial institutions are at risk.

UBS's $19 billion writedown in the first quarter compares with shareholders' equity of 42.5 billion francs at the end of 2007. The year-end figure doesn't include the funds raised from Government of Singapore Investment Corp. and an unidentified Middle Eastern investor last month.

`One Bank' Model

The writedowns have also affected UBS's private-banking business, which manages assets of about 2.3 trillion francs. Clients in Switzerland withdrew funds in the first quarter, though redemptions were offset elsewhere and net investments were ``slightly positive,'' Chief Executive Officer Marcel Rohner said on a conference call on April 1.

``The core private-banking franchise of UBS has been put under threat by the previous management's infatuation with investment banking,'' London-based Helvea analyst Thorne said. Arnold ``has such credibility that others will listen.''

The wealth-management unit is ``the most important and valuable,'' Arnold said in his letter. Separating it from the investment bank, which could be put in a U.K. or U.S. holding company, would still allow UBS to generate revenue from cooperation between units. The businesses would all still remain, ``at least for the time being, under one roof.''

``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 the writedowns,'' he said in the letter.

Economies of Scale

Arnold also proposed that UBS should ``seriously evaluate'' a sale of its Pactual Brazilian unit and the Australasian businesses to raise more capital. Some parts of the investment bank will also command ``an attractive valuation once markets have stabilized,'' he added.

Profond, a Swiss pension fund that holds about 1 million shares in UBS, supports all of Arnold's demands, Herbert Braendli, the fund's president, said in an interview today. The fund would also support Arnold's election to the board, if it were possible, he said.

UBS has argued that it would lose on additional revenue and cost savings if it were to separate its three main units. The company aims for all divisions to be profitable ``on their own'' and doesn't want ``any cross-subsidy to make the business successful,'' Rohner said earlier this week.

The arguments for having UBS as one bank ``are still pretty powerful,'' said Bob Parker, vice chairman at Credit Suisse Asset Management in London, which manages more than $600 billion. ``If you actually broke it up you'd lose the economies of scale'' from having one back-office operation.

Lacking Skills

UBS's losses cost the jobs of former CEO Peter Wuffli, finance chief Clive Standish and investment-bank head Huw Jenkins. Ospel, 58, was supposed to stand for re-election at the shareholders meeting on April 23 for a shortened, one-year term.

Kurer, who joined UBS in 2001, has been a member of the executive board since 2002. He previously worked at law firms Homburger AG and Baker & McKenzie in Zurich. Ospel told journalists on an April 1 conference call that Kurer was chosen because he ``has a profound knowledge of global financial markets and of course of our bank.''

Kurer, 58, headed Homburger's corporate transaction group and worked as counsel on mergers including Ciba-Geigy AG and Sandoz AG and the 1998 sale of British American Tobacco Plc's financial- services unit to Zurich Financial Services.

Arnold wrote that Kurer ``lacks precisely those skills most relevant'' to the board and called for an ``outstanding Swiss banker with proven strategic, risk management and communications skills be brought in as soon as possible.'' He recommended that Marchionne, Turin-based Fiat SpA's CEO, head the board until an alternative is found.

Record Loss

Ospel's drive to make UBS the biggest investment bank pushed the company to expand fixed-income operations at the peak of the U.S. housing market, only to join the list of investors burned by bets on mortgages in 2007.

UBS was among the first stung by the subprime contagion when its Dillon Read Capital Management LP hedge fund, run by former investment-banking chief John Costas, lost 150 million francs in the first quarter of last year. By May, following an internal review of the losses, UBS decided to close Dillon Read.

The company posted a 12.5 billion-franc loss in the fourth quarter, the biggest ever by a bank.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.netWarren Giles in Geneva at wgiles@bloomberg.net

Last Updated: April 4, 2008 12:35 EDT