Wachovia concerns stirred up by WaMu failure

NEW YORK — Although Wachovia has been mentioned as one of the more troubled big U.S. banks, at least some analysts think it is not at risk and is unlikely to suffer the same fate of Washington Mutual.

Still, investor anxiety about the future of the Charlotte, N.C.-based bank remained high Friday, the day after WaMu's failure, as Wall Street shifted its focus to other financial institutions that also suffer under the weight of mounting losses tied to toxic assets.

Adding fuel to the fire, media reports surfaced Friday afternoon that Wachovia had begun preliminary talks with potential suitors, including Citigroup, Wells Fargo and Banco Santander. Citigroup, Wells Fargo and Wachovia all declined to comment on the speculation. A representative of Banco Santander was not immediately reached.

Wachovia shares plunged $3.70, or 27 percent, to close at $10, after falling as low as $8.02 earlier in the session. Shares are down 74 percent this year.

On Thursday, the troubled Seattle-based Washington Mutual collapsed under the weight of hefty losses from bad mortgage bets. The Federal Deposit Insurance Corp. (FDIC) was forced to seize and sell its banking assets to JPMorgan Chase for $1.9 billion in an emergency sale. WaMu, the nation's largest thrift, became the nation's largest-ever bank failure.

"Wachovia is obviously trading down in sympathy," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners, in a telephone interview. "Investors are looking for who else out there has a large exposure to mortgage assets that potentially could be written down to a significant degree."

Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

"They made a mistake when they bought Golden West Financial, and they are paying for that now," said Joe Keetle, senior wealth manager at Dawson Wealth Management, who previously spent 25 years at Wachovia.

"The fundamentals at Wachovia right now are not really strong, there is no question about that. But the reaction today has more to do with WaMu going under and waiting for Congress to pass a bill. It's more emotional reaction today."

Bailout package

Like many other banks, Wachovia stands to benefit from the passage of the government's proposed $700 billion rescue plan — the details of which are still being hashed out by lawmakers.

"Wachovia needs Congress to pass this bill pretty quickly," said Ben Halliburton, chief investment officer at Tradition Capital Management. "The plan would be a big benefit for somebody like Wachovia."

While analysts are concerned by Wachovia's troubled assets, most agree that it is not in the same dire straits as WaMu had been before it was seized by the FDIC. The company has even been mentioned as a possible merger partner for Morgan Stanley.

"I don't think it's quite an apples-to-apples comparison," said Fitzsimmons. "The CEO of Wachovia has options at this point."

CEO ousted

Wachovia hired Robert Steel, former Treasury Undersecretary and Goldman Sachs Group executive, in July as its new chief executive. He succeeded Ken Thompson, who was ousted by the bank's board in June.

Wachovia has the benefit of time to use quarterly pretax, pre-provision income to boost its allowance for loan losses, Fitzsimmons said. The company's loan portfolio is also not as highly concentrated in mortgages as WaMu's. Additionally, the bank has a more attractive funding base than WaMu, Fitzsimmons said.

If anything, WaMu's failure may force Wachovia to raise additional capital or speed up its turnaround plans in some way to soothe investors in the short-term, analysts said.

"It is likely that Wachovia will need to issue equity to provide greater reassurance about its liquidity and solvency," wrote Deutsche Bank analyst Mike Mayo in a note to investors Friday. Mayo thinks the company will need to raise $11 billion in additional capital in order to shoulder the expected write-down on its loan portfolio, which Mayo forecasts at $24 billion.

"We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment," said spokeswoman Christy Phillips-Brown in an e-mail to The Associated Press.

But not all analysts believe the bank will be able to survive on its own.

"I personally think their best bet would be a merger or acquisition with another firm, someone with a bit more capital that could help them ride out the difficulties they are going to encounter in that portfolio over the next year or two," said Donn Vickrey, co-founder of Gradient Analytics.

This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs — mostly in its mortgage business — and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.

Earlier this month, Wachovia said it is on track to reduce securities and outstanding loans on its balance sheet by $20 billion this year, which will free up $1.5 billion in capital.

Additionally, Wachovia still expects to reduce expenses by $2 billion by the end of 2009.

However, the second-half expense benefit will be more than offset by $525 million to $650 million in severance and benefit costs related to previously announced job cuts, Wachovia said.