Wachovia struggling as BB&T makes gain

By: Richard Craver | JOURNAL REPORTER
Published: September 27, 2008

A tale of two banks is emerging in North Carolina through the fog of a historic financial crisis.

On one hand, investors appear ready to put the "Who's next?" tag on a laboring Wachovia Corp. As in, who's next to follow in the footsteps of Bear Stearns, Fannie Mae and Freddie Mac, Merrill Lynch & Co. and Washington Mutual Inc. -- each needing to be bought to avoid collapse.

On the other hand, there's BB&T Corp., which experienced not only a bump up in its share price this week, but also a bump in its reputation among analysts as a well-run conservative bank.

Wachovia's share price plunged 27 percent yesterday to close at $10, partly because of the gloomy outlook for the bank -- another major earnings blow is expected next month -- and partly because of being hit by shrapnel from Washington Mutual, the biggest bank failure in U.S. history. Reports surfaced yesterday afternoon that Wachovia had begun preliminary talks with potential suitors, including Citigroup Inc., Wells Fargo & Co. and Banco Santander.

The Federal Deposit Insurance Corp. seized Washington Mutual late Thursday and brokered a $1.9 billion purchase by JP Morgan Chase & Co.

By comparison, BB&T's share price rose by $1.20, or 3 percent, to close at $40.45 yesterday -- less than $2 from its 52-week high of $42.13 in Oct. 5, 2007.

"BB&T is benefiting from having stuck to its knitting and not going after the risky mortgage loans," said Joseph Gordon, of Gordon Asset Management LLC, an investment-advisory company in Durham. "It is in a good position to take market share from banks that are losing the confidence of their customers."

Analysts surveyed yesterday don't believe that Wachovia's financial status is as tenuous as that of Washington Mutual. "Wachovia is doing poorly, but not as sick as Washington Mutual was," said Morgan Housel, a banking analyst for The Motley Fool.

Analysts said that Wachovia would significantly benefit from the proposed $700 billion federal bailout, which would allow the federal government to buy bad mortgages so that troubled banks could free up money for lending. But they are concerned that a declining share price could limit its ability to raise capital.

Robert Steel, who took over as Wachovia's chief executive on July 10, said in a note posted on the bank's Web site yesterday that "we are strategically protecting and managing liquidity and capital in this challenging environment. We remain optimistic that our leadership in Washington will provide comfort to the markets with a plan to stabilize the housing and short-term funding markets."

Gordon said that Wachovia's troubles stem from the exotic mortgage loans it took over in its purchase of Golden West Financial Corp. for $24.2 billion in October 2006. "Wachovia's stupidity is that it bought its own form of Washington Mutual in Golden West," Gordon said.

Housel said that Wachovia remains an attractive takeover target. "Investors, once they sense failure in the marketplace, will try to predict the next bank to go," Housel said. "Right now, there's sentiment toward Wachovia and toward National City."

National City Corp., based in Cleveland, saw its share price fall 25.6 percent to close at $3.71 yesterday.

As Morgan Stanley has faded as a potential buyer, Goldman Sachs Group Inc. has emerged since Congress approved its conversion to a bank-holding company and the $5 billion investment in the company by Warren Buffett. Steel is a former Goldman Sachs executive.

Other potential buyers include Citigroup and Wells Fargo & Co. "In the new world of finance and socialism, the government appears willing to change its rule to favor a healthy bank taking over a weaker bank rather than allow the weaker bank to fail," Gordon said.

By comparison, as long as BB&T's construction-loan portfolio "doesn't blow up, and it does have some people nervous, it should be fine," said Bob Maneri, who manages financial-services stocks for Victory Capital Management in Cleveland.

The reputation of John Allison, the chairman and chief executive of BB&T, swelled this week, partly because the bank kept away from most alternative mortgages in 2005 through early 2007, and partly this week's letter to Congress cautioning against the bailout "not damaging well-run companies."

"John has positioned the bank in the best possible position it could be to take advantage of the coming fire-sale in banking that's going to occur as soon as we get through the mess," said Tony Plath, a finance professor at UNC Charlotte. "Without a doubt, they'll come out of this in the top-10 banks in the country."

■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.