Wachovia: The Problem with Guarantees

| About: Wells Fargo (WFC)

Wachovia (NASDAQ:WB) CEO G. Kennedy Thompson said in January:

Will Wachovia cut its dividend? And the answer to that question is we have no plans to cut the dividend, because we don't need to cut the dividend. We are confident in our ability to meet our 2008 business plan and that plan, as we have said before, will generate cash earnings that will cover our dividend payments, continue to build necessary credit reserves, improve our capital ratios and support growth in our business lines.

The company also said "Wachovia is expecting to earn "in excess" of a dollar per share each quarter for about $4.12 a share total in 2008." Today Thompson is learning the danger of making promises in turbulent markets, much like GE's (NYSE:GE) Jeff Immelt did last week with his "in the bag" comments from a month ago...

Wachovia posted a net loss of $350 million or 20 cents per share. It compared with a year-earlier profit of $2.3 billion, or $1.20 per share. Excluding items, the loss was $270 million, or 14 cents per share vs an expected profit of 48 cents per share.

Revenue fell 5 percent to $7.9 billion, short of the average $8.37 billion estimate. Wachovia set aside $2.83 billion for credit losses, and its investment bank took $1.56 billion of write-downs. They finally cut the quarterly dividend 41 percent to 37.5 cents per share (6% yield) from 64 cents, preserving $2 billion of capital a year.

Investors buying today still get a nice fat yield and the chance that anything Thompson says will hold true. His reputation and job are hanging now. It is one thing to make an assumption that turns out not to be true, it is quite another to chastise those doubting you and make a guarantee based on that which is stunningly wrong.

Is Wachovia a good investment long term? Sure. The question that now remains is whether or not Thompson will be around to see that time. His purchase of Golden West looks worse each day despite his proclamations to the contrary and now the dividend cut despite his assurance that he would not.

It is one thing to follow fellow banks Citigroup (NYSE:C), Merrill Lynch (MER) and UBS (NYSE:UBS) raising tens of billions of dollars from foreign and private equity investors, and last week Washington Mutual (WMU) getting cash from private equity form TPG. It is another to do so after laughing at those who said you would.

Disclosure: Long WB,C.