Wachovia Bank

October 3, 2008 – 6:05 am

2008-12-08 Blow Back:

The bail out of Wachovia was disguised as a buyout by Wells Fargo, but that little scam has blowback for the rest of the financial world and offers a new  business model/MO for future scams. 

 

2008-10-23 - Q3 Earnings Report:

Wachovia reported its fiscal third-quarter 2008 in what can be called red October, and may be its swan song. The bank took an $18.7 billion charge to write down the value of good will and wrote off $6.6 billion in credit losses tied largely to its disastrous purchase of Golden West Financial in 2006.  That purchase forced Wachovia to add $3.4 billion in reserves for future loan losses. The bank had $15 billion of loans for which it isn’t receiving interest, almost five times the amount in the same period last year.

1. Tally for Write-Downs/Charge-Offs: $12.9B + ($18.7  + $6.6B) = $38.2 B
2. Tally for cash raised: = $10.5 B
   
3. Current level of Level III assets at $ B
4. Current level of loan loss reserves at $4.2 B +$1.5B + $3.4 > $9.1 B 

We now sum all the distresses to get the Wachovia’s current Misery Index of ??

 

2008-10-03 The Graduate:

Just like the wedding scene in the movie “The Graduate” where dustin Hoffman pounds on the glass Wachovia dumped Citigroup right on the altar and flew away with Wells Fargo.

 

2008-09-29 - “Wachovia did not fail”

News has emerged that Citigroup is taking over the banking operations of Wachovia. Here is the official FDIC press release:

Citigroup Inc. will acquire the banking operations of Wachovia Corporation; Charlotte, North Carolina, in a transaction facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.

“For Wachovia customers, today’s action will ensure seamless continuity of service from their bank and full protection for all of their deposits.” said FDIC Chairman Sheila C. Bair. “There will be no interruption in services and bank customers should expect business as usual.”

Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

The last part is key.  This is not simply a “brokering” by the FDIC — they are taking on risk exposure.  They will have to pay out if the losses on Wachovia’s loan portfolio (note: this is at least $80B of pay option ARMs and over $200B of poorly-underwritten commercial and industrial loans) exceed about 13%.  That seems pretty easy to reach.

The FDIC is still making this up as they go, in a desperate attempt to avoid dinging the “insurance” fund.  At least this is a bit more fair than the WaMu/JP Morgan deal (which totally and arbitrarily wiped out debt holders), but it still looks crooked to us.  The 13% loss assumption is a joke — the FDIC is just kicking the can down the road.

Even if we assume the long-term value of the C warrants will be the full $12B, $12B+$42B is still only about 17% of Wachovia’s portfolio.  If the losses rise to above that (which is entirely possible), the FDIC will have to begin writing checks.

2008-08-16 Auction Anyone?:

Wachovia got a $9B hard number Friday when it came to terms with regulators on claims filed over auction rate securities that turned sour in the credit crunch. In addition, it will write-down $275M (pre-tax), similar to the $500M second-quarter write-down disclosed below.

Pain Factor = $50.5B, Auction Rate Securties to be bought back = $9B.

2008-08-13 Fessed Up:

Wachovia’s sale of sickly auction rate securities has cost it another $500M in legal reserves and will tack on $1.2B to its second quarter loss. We add the $500M write-down to the second quarter pain and bringing the new pain total to $50.5B.

2008-07-22 Q2 Earnings Report:

Wachovia has written down another $6B, nicely tying in with the bank’s $9B loss in the second quarter. Wachovia reported the results the morning after their wholesale mortgage origination imploded.

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.

1. Tally for Write-Downs/Charge-Offs: $6.8B + $6.1B = $12.9B
2. Tally for cash raised: = $10.5 B
   
3. Current level of Level III assets at $30.4 B
4. Bank added to loan loss reserves at $1.5 B + $4.2 B

We now sum all the distresses to get the Wachovia’s current Misery Index of $50.0 B

2008-07-17 Busted:

As states with disappearing tax revenues become more desperate for funds and less compliant to CEOs, the legal system may bring all its guns to bare against the big banks. This is something the bankers will have to nip in the bud. Let’s see how they do it.

2008-07-11 Sunk:

Wachovia’s actions scream that the bank is BEYOND RESCUE. By appointing a new CEO whose only qualifications are connections and only talents are subterfuge, the bank has admitted that the damage of the Golden West acquisition is fatal.

2008-07-01 Turnaround:

Wachovia’s interim CEO, Lanty Smith, went cheer leading employees to cut costs while the bank canned its “Pick-A-Pay” loans program. In doing so , Wachovia finally admitted what we all knew: the deal for Golden West was a bad one. What we don’t know is just how bad it will be for how many people it will be bad.

Additionally, we noticed from the table on page 88 of the bank’s May 12, 2008, 10Q filing that Wachovia contends with a hefty $30.4B of level 3 assets.

2008-06-02 Good Riddance:

After Wachovia’s board covering up losses that continue to pile up, shareholders have finally forced the removal of CEO Kennedy Thompson. The action portends more losses coming in the second quarter.

2008-05-22 Write-Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort, how much in write-downs and credit losses firms have written off per wholesale banking employee.

Wachovia - $7B, 3,900 employees, $1,794,872 per employee

2008-05-20 - Falling:

What were the doubled losses reported below due to? Well, it turns out that Wachovia tried to profit by taking out life insurance on their employees. These polices, known as Bank-Owned Life Insurance (BOLI), now face losses because the policies held the same types of investments that have gotten killed in the credit crunch. And guess what? They’re still getting killed.

2008-05-06 - Double The Losses:

Wachovia reported fiscal third quarter (Dec07-Mar08) earnings, stunning investors with a loss nearly double what it had warned last month. They also reported write-downs in the quarter of $2B and said they raised $8B in cash.

For all of fiscal 2007, Wachovia’s write-downs amount to $6.8B while the bank has raised over $10.5B in cash.

2008-04-30 - The Wachovia Matrix:

In a document obtained by the Mortgage Lender Implode-O-Meter dated April 29, 2008, Wachovia produced a matrix increasing minimum credit scores and dropping LTV’s, most down to 65%. An example: Owner Occupied, Rate & Term Refi, Quick Qualify, minimum score 700, Max LTV/CLTV would be 65%. The matrix includes 8 little notes that further detail specific restrictions.

2008-04-14 Q1 Earnings Report:

As expected, the news is in and blood is on the street as investors punished the stock down 11% to under $25. The write-downs due to subprime-related mortgages were $1.6 billion and

Wachovia cited $1.6 billion in writedowns of securities that included subprime and consumer home loans, commercial mortgages, consumer mortgages and leveraged buyouts. The bank also sold $7 billion of stock and cut the dividend due to the rusting of Golden West.

In addition to the write downs and cash raised the bank bukled up on loan loss resevres to the tune of $2.8B in the quarter.

1. Tally for Write-Downs/Charge-Offs: $3.2B + $1.6B = $4.8B
2. Tally for cash raised: = $7.0 B
3. Current addition to  loan loss reserves at $1.5 B + $2.8 B = $4.3B

 

2008-04-13 - Wounded:

As reported below Wachovia was to report first quarter earnings on Friday, April 18, but an emergency operation has forced that up to tomorrow. This comes after the $8.3 billion infusion just two months ago and reveals that Wachovia, like WaMu, is wounded much worse that anyone had realized. Look for a big change to the $3.2B write-down total.

2008-04-03:

Wachovia is due to report first quarter earnings on Friday, April 18, 2008. There has been little news on the bank since our last post, other than the expected further subprime-related write-downs that are expected.

Analysts for Keefe, Bruyette and Woods lowered first-quarter earnings estimates for Wachovia Corp.to $2.65 from $3.25 per share Monday on worries that the bank would face further write-downs in its mortgage portfolios. Analyst Jefferson Harralson predicted that for the first quarter Wachovia would write down around 8% of its $3.6 billion of commercial mortgage backed securities and as much as 10% of the bank’s $9.1 billion in leveraged lending and RMBS/ABS CDO-related exposures. Harralson also warned of increasing margin pressure and the possibility that Wachovia could be a potential acquisition target in 2008.

But now come rumors that Wachovia may end it’s “pick your poison” repayment plan. In a memo/leak, Wachovia’s top California managers told employees that the loans would no longer be offered in 17 California counties where property values have declined the most. The move probably has little substance. Wachovia likely leaked the information to float the idea for any of those potential buyers.

the bank said Wednesday that the memo had been sent prematurely and that it had not decided whether it would stop making the loans.

And it probably will not decide. It will probably be one of those bigger fish, deciding how it wants Wachovia seasoned, who decides in the end.

2008-02-25:

In a fascinating drama, we have a report from the IHT on Wachovia suing the buyer of a Clear Channel unit, Providence Equity Partners, its own client in a current LBO deal involving Clear Channel:

The deal in jeopardy is Clear Channel’s $1.2 billion sale of its television unit to Providence Equity Partners, a media-focused buyout firm. Providence began to balk at the price, citing deterioration in the business and the economy, prompting a lawsuit by Clear Channel.

Yet by late last week, the two sides had struck a deal in principle to lower the price by $100 million.

But now comes a new bombshell. Wachovia, one of the three banks financing the deal, is refusing to commit. It even sued its client, Providence, in a North Carolina state court Friday, contending that the new agreement had voided its previous commitment.

…

Wachovia has an unusual role in Clear Channel, which is based in San Antonio, Texas, and is the largest owner of radio stations in the United States. Even as it seeks to sell its television unit, Clear Channel is busy trying to close an even larger $25 billion buyout of the rest of the company. Wachovia, based in Charlotte, North Carolina, had committed to financing both deals.

The article points out that it is rare to see an investment bank sue its own client, especially with other (much larger) deals on the line, and that this move doesn’t even make much tactical sense:

Some people inside the deal speculate that Wachovia may be seeking to create an escape hatch from the larger buyout. But it is unclear how Wachovia will accomplish that: The $25 billion deal is not contingent on the sale of the television stations.

Wachovia runs a high risk by suing its own client and killing the television stations deal. As part of financing the larger $25 billion deal, it also agreed to help finance a bridge loan if the smaller deal fell apart.

It may also risk damage to its reputation by turning on its own client. Never one of the biggest players in the leveraged loan market, Wachovia may see its business dry up if potential clients see the bank as a potential turncoat when things go bad.

That may be fine with Wachovia, especially if the bank is now seeing M&A/leveraged loan business as mostly a cash drain and earnings pain for the forseeable future.

At any rate, the “law of the jungle” lack of decorum here suggests Wachovia is interested in exiting the pretended role of “money center bank”… and quickly. Our earlier write-ups (below), along with the continued ailing state of anything combining leverage and debt markets, may provide hints as to why.

2008-02-21:

Oppenheimer analyst Meredith Whitney estimates Wachovia is exposed to write-downs of $9.1B as of Q4 2007 due to leveraged loans it used to finance buyouts during the year.

2008-02-20:

CNN has an article today expressing skepticism about the benefit of the former Golden West unit to Wachovia’s future bottom line. Some key points:

In an earnings call in January, Thompson conceded that the housing downturn is going to result in more charge-offs than Golden West faced even in its toughest times. Nonperforming assets in Wachovia’s option ARM portfolio last year totaled $2.77 billion, three times the amount from a year earlier - though as a percentage of the loans, Wachovia is still holding up far better than other banks, and it expects its option ARM business to remain profitable in 2008.

One factor that makes things different from past downturns is that borrowers are showing a new willingness to walk away from their mortgages, even if it means destroying their credit. “We’re in a brave new world of consumer behavior with all mortgage products,” says Frederick Cannon, an analyst at Keefe, Bruyette & Woods.

That’s an apt observation — even deep-prime Golden West borrowers may be tempted to walk away from their deeply-underwater homes (the value declines effect everyone now). While one might argue that these people won’t be likely to want to damage their credit by walking, it is equally true that plenty of these borrowers will be shrewd enough to realize they don’t have to take a huge loss on their house.

We’d also add recession-driven job loss to the pile of reasons to be bearish on the future earnings of this unit — and hence Wachovia as a whole.

2008-01-29 Q4 2007 Earnings Report:

While not coming near the major money center banks in terms of the sheer size of write-downs, Wachovia has caught its share of contagion. Its fourth-quarter 2007 results were a disaster, beating retail rival Bank of America in the “race to zero” as its earnings fell by a whopping 98%. But hey, they could have had an outright loss like UBS or Citigroup.

They still have time.

Wachovia took $1.7B in write-downs for the quarter. Most of this (about $1B worth) was reportedly due to subprime CDOs. The rest were other sorts of mortgage loans. According to Deutsche Bank data, Wachovia had projected about $1.1B in write-downs for the quarter; looks like that was a bit low. Also of note is that the bank had to increase its loan loss provisions by $1.5B in the quarter.

Wachovia took about $1.5B in subprime-related write-downs in the previous quarter.

Also according to Deutsche Bank, Wachovia has about $676M in subprime CDOs remaining, and about $2.1B in direct subprime RMBS (some of this may have been written down in the fourth quarter, but probably not most).

The gigantic elephant remaining in the room, however, is the “legacy” Golden West portfolio. Golden West was a California-based pay-option ARM lender (coupled with a bank called “World Savings”) whom Wachovia bought in late 2006. That purchase was panned by shareholders and analysts as the move smacked of “buying at the peak,” or a belated attempt to capitalize on the housing bubble. Wachovia continues to defend the $24.2B purchase based on Golden West’s “high underwriting standards”.

Golden West’s legacy portfolio, consisting overwhelmingly of Option ARM loans in California, amounts to almost $80B. If these “prime” loans begin to sour higher than projections modeled a few years ago, as all indications suggest they will, Wachovia could find itself with a huge source of future write-downs. Indeed, it appears this is already starting to happen:

Rising credit losses from the former Golden West was one factor behind the 98 percent decline in Wachovia’s fourth-quarter profit. Wachovia more than tripled the amount it set aside for overall loan losses, including other businesses.

Ah, yes, that $1.5B we mentioned above. Yes, these are technically not “write-downs”, which is why Wachovia can say it has had no “impairment charges” related to the unit — and projects that they won’t.

But we suspect they will disappoint on that last item.

 

1. Write-Downs/Charge Offs = $1.7B
2. Loan Loss reserve              =  $1.5B 

 

 We add in $1.5B of write-downs for Q3 2007, the official start of the bubble burst.

Tally for Write-Downs/Charge Offs = $1.7B + $1.5B =$3.2B

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