UBS AG, the Swiss bank that received $59.2 billion in an unprecedented national bailout, is facing growing pressure from government officials on both sides of the Atlantic to resolve a U.S. tax evasion investigation and restructure its loss-making investment bank.

While the tax probe threatens UBS's business in the U.S. where the company derives almost 20 percent of revenue, the Zurich-based bank is struggling to stabilize its wealth-management units after clients withdrew a record 101 billion Swiss francs ($87 billion) in 2008, JPMorgan Chase & Co. analyst Kian Abouhossein estimates. UBS shares slumped 63 percent during the past 12 months, more than any bank in the benchmark Swiss Market Index.

Pressure is intensifying on Chairman Peter Kurer, whose one- year term expires in April, to restore earnings. After helping UBS unload subprime and other toxic U.S. mortgage-backed securities, the Swiss government wants management to move faster to reorganize the investment bank, which analysts estimate had a loss last year of 32.5 billion francs, and to stop customers from pulling funds, said a person familiar with the matter who declined to be identified.

"UBS seems to be a magnet for a particular slew of problems," said Scott Moeller, a finance professor at Cass Business School in London and former banker at Morgan Stanley and Deutsche Bank AG. "They need to do something quickly."

UBS has said it will reduce risk-taking and the balance sheet, scale down the securities unit to complement wealth management and return to profitability this year. The company lowered assets by more than $700 billion since June 2007, announced 9,000 job cuts, and raised $32 billion from investors to replenish capital after $48.6 billion of losses and credit- market writedowns, according to data compiled by Bloomberg.

Biggest Swiss Loss

The largest Swiss bank may report a loss of almost 18 billion francs for 2008 when it publishes results on Feb. 10, according to the median estimate of eight analysts surveyed by Bloomberg. It would be the most in the country's history. The fourth-quarter deficit was probably 6.3 billion francs.

Executives at UBS declined to comment. Kurer told shareholders at a Nov. 27 meeting that the Swiss government's aid package "wasn’t an unavoidable emergency action" and rather a "preemptive measure" to regain confidence.

Raoul Weil, the former head of wealth management, UBS's biggest unit, was declared a fugitive from U.S. justice last month and Jerker Johansson's position as head of the investment banking division is tenuous, said four bankers who work in the group.

Shrinking Assets

UBS has lost 79 percent of its market value from the peak in June 2007, compared with the 68 percent drop of Zurich-based Credit Suisse Group AG, the second-biggest Swiss bank, in the same period. Deutsche Bank AG in Frankfurt, the largest German bank, fell 82 percent and London-based HSBC Holdings Plc, Europe’s No. 1 bank by market value, declined 42 percent.

Of the 39 analysts who track UBS, eight recommend investors sell the stock, Bloomberg data show. By contrast, five are telling clients to get rid of Credit Suisse shares. UBS may climb 33 percent to 19.42 francs in Swiss trading in the next 12 months, according to the average estimate of analysts in the survey.

Kurer, 59, told investors in Zurich last month that the recovery of UBS's reputation and a settlement of the probe into whether the bank helped 20,000 wealthy clients avoid American taxes are priorities for this year. Both have the potential to further erode UBS's wealth-management subsidiary, from which clients may redeem another 65 billion francs in 2009, according to JPMorgan's Abouhossein in London.

Cayman Islands

UBS's assets under management probably will drop to 2.3 trillion francs this year from 3.3 trillion francs in mid-2007, Dresdner Kleinwort analyst Stefan-Michael Stalmann said. While assets are down to levels last seen in early 2005, UBS employs about 10,000 more people at the units than four years ago.

The executive team hasn't yet proven it can achieve a turnaround to stop client withdrawals, said Florian Esterer, a senior portfolio manager at Zurich-based Swisscanto Asset Management AG, which oversees about $48 billion and owns UBS shares. "I'm afraid it will be pretty difficult. One big problem for UBS is the U.S. investigation," he said.

UBS may pay a $1.7 billion fine as part of a settlement with U.S. authorities before the next meeting of the Senate's Permanent Subcommittee on Investigations, scheduled for Feb. 24, said a person with knowledge of the matter.

Conspiracy Charges

UBS also may turn over 200 to 1,000 accounts that had a middleman between the Swiss account and the account-holder, typically a Liechtenstein trust or Cayman Islands corporation, said two people with knowledge of the probe. The entities were set up so clients could invest in U.S. securities without being detected by the Internal Revenue Service, they said.

The use of such entities may be viewed as fraud in Switzerland, which would provide a reason to turn over the documents to U.S. authorities, the people said. U.S. officials are also looking into American accounts in other parts of UBS's business, three people with knowledge of the case said.

UBS is straddling the divide between cooperating with U.S. officials and maintaining the confidentiality of its clients, a cornerstone of Swiss banking. Sabine Jaenecke, a spokeswoman for the bank, declined to comment on the U.S. inquiry.

"Nearly any level of financial settlement would be good news, if it was capable of delivering finality and the ability to return to repairing the brand," Credit Suisse analysts Daniel Davies and Rupak Ghose wrote in a Jan. 29 note to clients.

Madoff Connection

Weil, 49, who became head of wealth management after Marcel Rohner, 44, was named chief executive officer in July 2007, was indicted on conspiracy charges in the U.S. tax case and stepped down from his role at the bank in November. Weil has denied allegations through his lawyer.

In his indictment, U.S. prosecutors said that about 60 private bankers "routinely" traveled to the U.S. to conduct unlicensed banking and investment advisory activities in the country. Former UBS private banker Bradley Birkenfeld pleaded guilty in June to helping Igor Olenicoff, a California billionaire, dodge taxes. He also described schemes used by UBS bankers to help conceal clients' assets, including the smuggling of diamonds into the U.S. in a toothpaste tube.

Olenicoff in turn sued UBS, naming Kurer, the former general counsel, as one of the defendants in an alleged plot to dupe the billionaire and other U.S. clients about their tax liabilities and put them "in the cross-hairs of a criminal investigation."

Jaenecke declined to comment when asked for Kurer’s response to the allegations.

'Issue of Leadership'

UBS also faces legal wrangling from its role as custodian for the $1.4 billion LuxAlpha Sicav-American Selection fund in Luxembourg, which invested with Bernard Madoff, who allegedly ran a $50 billion Ponzi scheme. French investors in the fund filed a request with Luxembourg’s financial regulator last week to order UBS to reimburse them for losses. LuxAlpha Sicav was established at the request of clients, UBS has said.

Kurer's nomination to replace Marcel Ospel as chairman met opposition last year from shareholders led by Luqman Arnold, 58, a former UBS president, who said the lawyer lacked the experience to run a bank with 2.23 trillion francs of assets and 84,000 workers at the time.

Vice Chairman Sergio Marchionne told a Swiss magazine in October that Kurer wouldn’t have been on the candidates' list to replace Ospel, 58, if the bank had more time to find a successor, and conceded that some directors also had doubts about Rohner's appointment at the time.

Management Changes

"There is an enormous amount of pressure at UBS, and while the Swiss government isn't directly interfering, Kurer and Rohner know they have a short life span in that position," said Markus Granziol, 57, former chairman and CEO of the company's investment banking subsidiary. "The issue of leadership is a big question."

The appointment of Swedish-born Johansson, 52, who joined last March from New York-based Morgan Stanley where he co-headed sales and trading, also stirred criticism because his background was primarily in equities rather than fixed-income, where most of UBS's losses occurred.

"We saw something in Jerker Johansson that we thought was adequate to run the investment bank," Marchionne, the 56-year-old CEO of Fiat SpA, said after the UBS shareholders' meeting last April. "We'll put him to the test and find out whether he can or cannot do it."

The investment bank's goal for 4 billion francs in pretax profit, set by Johansson last May, won't be reached this year or even next, according to estimates from analysts including Citigroup Inc.'s Jeremy Sigee and JPMorgan's Abouhossein.

Losing Market Share

Ten months into Johansson's tenure, the new heads of the fixed-income unit, hired late last year, announced that further "radical change" is needed to return that business to profitability.

UBS plans to exit the real estate and securitization, and so-called exotic structured products businesses, Carsten Kengeter and Jeff Mayer said in a Jan. 21 memo that didn't mention Johansson.

Todd Morakis, who ran commodities, Sascha Prinz and David Sacco, co-heads of global rates, and credit head Chris Ryan will leave the bank, the memo to employees said. An unspecified number of jobs also will be eliminated, adding to the 6,100 announced since October 2007.

In equities, UBS hasn't regained the market share it started losing in 2007. The bank generated the second-largest sales and trading revenue from equities behind Goldman Sachs Group Inc. in 2006, data compiled by Bloomberg show. It probably ranked fourth last year behind New York-based Morgan Stanley, Goldman Sachs and Merrill Lynch & Co., company reports and analysts' estimates show.

'Fight Fires'

All Johansson "was able to do this year was fight fires," said Andy Lynch, who oversees about $2 billion at London-based Schroder Investment Management Ltd., including UBS shares. "The main focus was on reacting to market crises rather than being able to actively follow any strategy."

As the bank plots more job reductions, UBS's losses and the state’s assistance have aroused a public backlash against bonuses for bankers. The 2008 bonus pool for UBS staff, excluding brokers in the U.S., dropped more than 80 percent to less than 2 billion francs.

"Even if the most highly paid take the brunt, a lot of people will be getting very little," said Philip Keevil, a senior partner at London-based Compass Advisers LLP and a former head of investment banking for Warburg in the U.S. "This will be the acid test to see if they lose the really good people."