Business
Email
Print
Wachovia's dire state shown in $24B loss
Quarterly result is said to refute notion it could have survived
ADVERTISEMENT
Published: October 23, 2008
Wachovia Corp. will end its run as a 129-year-old independent bank by posting the largest quarterly loss ever for a U.S. retail bank -- a staggering $24 billion.
The previous largest quarterly loss by a bank was $9.8 billion by Citigroup Inc. in the fourth quarter of 2007, according to Standard & Poor's.
The Washington Post reported that the nearly $34 billion in losses that Wachovia has recorded this year "wipes out nearly all the profits the bank has earned" since First Union Corp. bought it in 2001.
Excluding a write-down of $18.7 billion and a merger-related and restructuring expense of $414 million, the bank lost nearly $4.8 billion or $2.23 a diluted share.
Analysts said that the huge loss helps explain the sense of desperation that Wachovia management and federal regulators had to find a buyer for the bank.
The bank is being bought by Wells Fargo & Co. in a deal valued yesterday at $13.3 billion.
John Stumpf, the president and chief executive of Wells Fargo, said in a statement that Wachovia's losses "were very much in line with our expectations."
Analysts said that the loss also provides a definite answer of "No" as to whether Wachovia could have survived on its own under the weight of the toxic mortgages in its portfolio.
"Wachovia would have been toast without the Wells Fargo, or Citigroup, deal," said Morgan Housel, an analyst with The Motley Fool financial Web site. "Investors and depositors would have seen the $24 billion loss as writing on the wall and jumped ship quickly."
Most analysts have placed the most blame for Wachovia's collapse on the $25 billion purchase of Golden West Financial Corp. in 2006. The deal for a bank that specialized in alternative and riskier mortgages was made at the peak of the housing boom.
A majority of the $18.7 billion write-down relates to the bank's retail and small-business unit, under which the bank's troubled Pick-a-Pay mortgage portfolio is included. The bank was forced to write down the value of these assets because they were considered overvalued compared with the market value -- or what Wells Fargo was willing to pay.
The report also revealed the magnitude of the deposits and assets run-off Wachovia experienced in the third quarter. Much of that run-off occurred in late September, when the bank teetered on collapse until Citigroup, and then Wells Fargo, kept Wachovia financially afloat.
Wachovia reported that it lost 6 percent of its total assets in the quarter, or $48 billion, which stood at $764.4 billion on Sept. 30. Total deposits fell by 6 percent, or nearly $29 billion, to $447.8 billion.
Joseph Gordon of Gordon Asset Management LLC said that the third quarter is easier to swallow "now that a healthy buyer came to the rescue."
Gordon said that the federal bailout plan allows Wells Fargo to take advantage of the Wachovia losses "by sheltering income for years. It also gets a full refund for taxes paid in the past two years of around $7.4 billion, my sources indicate."
Wachovia's wealth-management division, which is based in Winston-Salem, was one of the bank's few bright spots in the quarter. The division posted a 5 percent increase in earnings to $84 million, compared with a year ago. Revenue was up $16 million to $388 million.
However, assets under management in the division dropped from nearly $77 billion on June 30 to $73.2 billion on Sept. 30.
The bank recorded a $6.63 billion loan-loss provision in the quarter compared with $408 million a year ago. Net charge- offs, or loans written off as unpaid, totaled nearly $1.9 billion. Nonperforming assets, including loans held for sale, were $15 billion.
"We believe that it was prudent for Wachovia to put these losses behind them," said Howard Atkins, the chief financial officer of Wells Fargo. "We're on track to complete the merger as planned in the fourth quarter."
Housel, the analyst from The Motley Fool, said that given the $24 billion loss, Wachovia shareholders "should be thanking their lucky stars that Wells swooped in with the $7 offer."
Tony Plath, a finance professor at UNC Charlotte, said that based on Wachovia's extensive credit losses and deposits run-off, "I don't see how the bailout plan would have saved the bank without massive government intervention."
"Wachovia's not a victim of a hostile economic environment. It's suffering the consequences of a failed business strategy," Plath said. "It's not the taxpayers' responsibility to rectify the sort of errors made by Wachovia's management and board of directors."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
■ The Associated Press contributed to this article.
Email
Print
