Wachovia Losses, Report Reveals $8.9 Billion
Wachovia’s new chief, Robert Steel, delivered a record loss of $8.9 billion for its second quarter, along with plans to slash dividend payouts to shareholders and cut thousands of jobs, disappointing news for the nation’s fourth-biggest U.S. bank.
Wachovia’s net charge-offs - loans it doesn’t believe it can collect - soared to 1.10% of total loans from 0.14% a year ago and 0.66% in the first quarter. Loans nearing default rose to 2.41% from 0.49% and 1.70%, respectively.
Wachovia’s performance results are far worse than what Wall Street analysts originally predicted. Much of the bank’s financial problems stems to the fallout from its 2006 acquisition of Golden West Financial Corp.
At the height of the subprime crisis, Wachovia paid more than $25 billion for the Oakland, California-based lender, which specialized in risky “pay-option mortgages†that essentially allowed borrowers to skip some of their payments.
The Golden West acquisition proved to be an ongoing source of trouble for Wachovia and ultimately cost former CEO Kennedy Thompson his job. In April 2008, Wachovia moved to tighten up its underwriting standards, and last month made the decision to stop offering negative amortization mortgages altogether.
Adding to a disappointing second-quarter are Wachovia’s plans to slash its stock dividend to 5 cents per share from 37.5 cents. The company also will eliminate about 10,750 jobs, as it attempts to become a leaner Wachovia.
In the wake of its earnings announcement, three rating agencies – Moody’s Investors Service, Standard & Poor’s and Fitch Ratings - downgraded their ratings on Wachovia’s debt, citing increased expectations of losses in the bank’s mortgage portfolio and its reduced flexibility to raise more capital.
Things have gone from bad to worse for Wachovia this year. On July 17, Securities regulators from several U.S. states raided the St. Louis headquarters of Wachovia Securities, which is part of Wachovia Corp., seeking documents and records on the firm’s sales practices of auction-rate securities.
Both Wachovia Corp. and Wachovia Securities also are named in a lawsuit filed this past March, which seeks class action status for customers say they were misled about the quality, risk and characteristics of auction-rate securities.
Meanwhile, Wachovia’s $8.9 billion second-quarter loss marks the first time the bank has posted consecutive losses in at least two decades. This time, however, the loss is unprecedented - more than 12 times that of Wachovia’s first-quarter loss.
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