The drumbeat of bad news continues for Wachovia, the fourth largest bank in the US. New CEO Bob Steel, the former undersecretary of the US Treasury who joined the company two weeks ago, certainly has his work cut out for him. The company announced Tuesday that it posted losses of nearly $9 billion in the second quarter of 2008, wrote off some $6 billion in assets, set aside more than $5.5 billion to cover future losses, is cutting dividends by 90%, and is eliminating approximately 10,000 jobs, including the layoffs of more than 6,300 employees.
At the crux of Wachovia’s troubles are so-called Pick-A-Pay mortgages, which allow borrowers to choose one of four monthly payment options. The bulk of these loans, most of them acquired when Wachovia bought Golden West Financial in 2006, are secured by homes in the hard-hit Florida and California real estate markets. The default rate of Wachovia’s $122 billion worth of Pick-A-Pay loans is hovering around 6%, and the company says that figure could balloon to 12% by 2009. (The national average for all mortgage defaults is currently around 1%.)
Wachovia has already raised more than $8 billion in capital from investors in 2008 alone, but may also be compelled to divest some of its operations in order to bring in more money. The most obvious candidate to be sold, according to some analysts, is the company’s Wachovia Securities subsidiary. It is perhaps Wachovia’s most successful business, though it has seen its assets under management dwindle by some 10% since its acquisition of A.G. Edwards last year. What’s more, Wachovia Securities’ St. Louis headquarters were raided last week by Missouri state regulators seeking information on the unit’s sales, pricing, and marketing of auction-rate securities after the market for the arcane financial instruments collapsed in February. [UPDATE: Please see the comment from Wachovia spokesperson Teresa Doughery regarding the state's actions.]
For its part, Wachovia is determined to weather the storm. Still, JPMorgan Chase is mentioned as a possible buyer of Wachovia Securities, if not all of Wachovia.
Comments
Teresa Dougherty Says:
July 24th, 2008 at 11:08 am
Ryan, I do want to clarify one point in your article. Please refer to the Missouri Secretary of State Web site to see a retraction statement the office released concerning Wachovia Securities and the special inspection at the Saint Louis home office.
http://www.sos.mo.gov/news.asp?id=719
Teresa Doughery
VP, Corporate Communications
Wachovia Securities, LLC
RTK Says:
July 24th, 2008 at 11:59 am
You write “Wachovia Securities’ St. Louis headquarters were raided last week by Missouri state regulators”.
That is absurd. Wachovia was not “raided” by anyone. It was a ridiculous publicity stunt by the MO Sec of State, which only served to further erode consumer confidense. The company knew that suits were coming, but you write as if they raided the place, guns drawn, while Wachovia execs scurried out the bathroom windows like rats.
Did you read the article you quoted? (http://www.reuters.com/article/ousivMolt/idUSWEN674920080717?pageNumber=2&virtualBrandChannel=0)
How about this part: “Regulators from Missouri, Illinois, Massachusetts, New Jersey, Pennsylvania and a sixth state that asked not to be identified were part of the team entering Wachovia Securities’ headquarters, Missouri officials said.”
That sixth state didn’t want to be identified, because when they figured out the “raid” was nothing more than a scam by the State of Missouri, they said they wanted nothing to do with it and left.
I can understand Reuters et al having no journalistic integrity; but bloggers are supposed to be on top of their game.
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