July 22, 2008 – 11:51 am

The we beat the street parade to a pause today as Wachovia -not one of the chosen– delivered worse-than-expected results along with $6.1 billion in write-downs, and the implosion of it’s wholesale lending division.

The shares had fallen after the company said it recorded $6.1 billion in write-downs for bad investments related to the mortgage and credit crises and increased its write-off and loan-loss provisions…

The firm added $5.6 billion to its loan-loss reserve to cover net charge-offs and to increase the reserve by $4.2 billion.

The cost cutting plan includes cutting 10,750 jobs and an evisceration of the dividend from 37.5 cents to 5 cents.

In addition to the record loss and desperate measures, Wachovia said:

Consistent with previously announced expectations, Wachovia today reported a net loss in the second quarter of 2008 of $8.9 billion, or a net loss of $4.20 per share, including a $6.1 billion noncash goodwill impairment charge in commercial-related subsegments reflecting declining market valuations and asset values. The goodwill impairment charge has no impact on Wachovia’s tangible capital levels, regulatory capital ratios or on liquidity.

Wachovia added $5.6 billion to its loan loss reserve to cover net charge-offs and increase the reserve by $4.2 billion.

Net charge-offs are what the bank believes it cannot recover, and the loan loss provision is an insurance against future bad loans. Both bode ill for Wachovia. Regardless of any attempts to rev up the spin machine, management knows it has to fess up a little:

“These bottom-line results are disappointing and unacceptable,” said Lanty L. Smith, Wachovia’s board chairman, who served as interim chief executive officer beginning June 1. “While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility. Our company is facing up to these issues, is addressing the challenges head-on and has redirected near-term strategic priorities.”

Well, it was more likely GREED than industry headwind or weaker macroeconomic conditions as every fool around knew that the Golden Rust Bucket Wachovia dished out $24B for would be a bust:

Wachovia’s problematic option ARM portfolio, also known as a Pick-a-Pay mortgage, actually grew between the first and second quarters, reaching $122.2 billion of the bank’s $488.2 billion in total loans; no other U.S. bank has as much exposure to option ARMs in real-dollar terms.

It’s worth noting that while Wachovia grew its Pick-a-Pay exposure during the quarter, it actually saw its more traditional mortgage holdings shrink. If you believe option ARMs are toxic to a bank’s balance sheet, this is a telling trend, and one that Wachovia’s new CEO is likely to have to tackle before anything else can be righted financially at the bank.

It’s unlikely that Paulson -on loan from Goldman Sachs- lent out his right-hand man Robert Steel as the bank’s new CEO two weeks ago so that he could “right the ship.” Business on Wall Street is done via connections, privilege and pay out. Once the bank saw that it was not among the 19 delivered ones, the call went out and the fix went in.

Just how deep that fix goes remains to be seen. Steel has been at the helm only two weeks, and a beat the street by Wachovia would have been a “much too vulgar display of power.” So far, every bank on the chosen list has delivered “better than expected ” earnings and had their shares rally. Wachovia simply wasn’t chosen.


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