updated 4/4/2008 1:41:47 PM ET 2008-04-04T17:41:47

UBS AG, already wincing from massive write-downs caused by the subprime crisis, has taken another blow as a former CEO is pushing the Swiss bank to separate its private client operations from the stumbling investment unit.

A shareholder group cheered the proposal from the bank’s former CEO Luqman Arnold and investors agreed, sending its stock higher on Friday.

UBS has reported write-downs of $37.4 billion for the past nine months — so far the largest reported by any bank with exposure to U.S. defaults on risky mortgages. It expects first-quarter losses of $12.1 billion and said it would seek $15.1 billion in new capital.

Arnold, who was dismissed as CEO in 2001 in what was seen as a power struggle, said that may not be enough.

“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,” Arnold said in a letter dated Thursday from his investment firm Olivant Ltd.

UBS spokeswoman Tatjana Domke confirmed that the bank had received the letter and said it would respond in due course. It was addressed to incoming UBS Vice Chairman Sergio Marchionne, who is also CEO of Fiat Group SpA.

Shares in UBS rose 3.3 percent to 33.46 Swiss francs ($33.06). Arnold’s proposal will likely draw support from some investors who have said UBS should consider splitting off the private client bank from the investment operations, which they blame for moving the traditionally conservative bank into trading high-risk mortgage securities.

UBS, Switzerland’s largest bank, said it sees losses and write-downs of approximately $19 billion in the first quarter on U.S. real estate and related credit positions. Officials have stuck to the bank’s integrated model, which can offset losses in one unit with profits in others.

Arnold noted that Olivant owns more than 0.7 percent of UBS shares and said it would favor greater separation and independence of the bank’s major units.

He left open the possibility that the investment bank could eventually be sold, but he said that “the businesses, albeit more independent, would still remain, at least for the time being, under one roof and owned by one set of shareholders.”

“Arnold’s logic for breaking up the bank cannot be faulted and events of the last year just confirm that,” said Peter Thorne, an analyst with independent brokerage Helvea. “The supposed synergies of having investment banking and private banking in one company have been grossly overstated by the previous UBS management.”

Shareholder lobbying group Actares also welcomed the call to split off UBS’ investment bank. The group, which votes on behalf of UBS shareholders who give their voting rights to it, has already been urging a separation of the different units.

In the letter, Arnold said UBS should find other sources of capital without resorting to shareholders. He suggests selling the asset management unit as well as Banco Pactual, a Brazilian investment branch and branches in Australasia.

Arnold, who was CEO for just eight months, was ousted over “differences in opinion.” Chairman Marcel Ospel said later that the differences were cultural rather than personal. The bank declined to give further details, but Ospel biographer Dirk Schuetz said there had been a power struggle at the top of UBS between Ospel and Arnold.

Arnold, a former CEO of Abbey National PLC, also criticized the appointment of general counsel Peter Kurer to succeed power-broker Ospel as chairman. Ospel announced Tuesday that he was stepping down, saying he took ultimate responsibility for the bank’s situation. Arnold said Kurer lacks the strategic and risk management skills specific to the Swiss market.

The bank should hire a non-executive as chairman, he added.

Arnold said UBS “needs to act with urgency.” Olivant, which had been in the running to take control of stricken mortgage lender Northern Rock PLC, is “cautious about the prospects for the U.S. housing market and the outlook for credit markets,” he said.

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