Wachovia Can't Seem To Do Anything Right

An analyst at RBC Capital Markets suggests Wachovia cut corners to join the trillion dollar asset club. MarketWatch has the story in Wachovia's commercial loans stir worries; my comments follow.

"This company's mantra was grow, grow, grow," Gerard Cassidy, an analyst at RBC Capital Markets, said in an interview. "They were so focused on wanting to be in the trillion-dollar asset club for banks that they cut corners."

Until now, most analysts and investors have focused on Wachovia's (WB) $122 billion portfolio of so-called pick-a-pay mortgages, inherited from the infamous acquisition of lender Golden West at the height of the housing boom in 2006. These kinds of negative-amortization mortgages allowed borrowers to pay less than the required monthly amount, increasing the size of the loan. As house prices slump, more of these home loans are souring.

But Wachovia also has more than $200 billion in commercial loans that could trigger even more losses if the U.S. economy slides into recession, according to Cassidy. "This is more frightening to me because it's bigger," he said.

Can Wachovia Do Anything Right?

Wachovia (WB) has messed up badly in Alt-A, in taking advantage of older customers, in cutting corners on loans, in having to restate losses, in Pick-A-Pay mortgages, and possibly in a drug-money laundering scheme. Yesterday, New York Attorney General Cuomo said he is expanding his investigation into the collapse of the auction-rate securities market to include JPMorgan (JPM), Morgan Stanley (MS) and Wachovia Corp.

Indeed, Wachovia's list of problems seems to grow every day, just like Pinocchio's nose. Yet, it is very difficult to do anything right when your biggest concern is to grow, grow, grow, with no system in place to control risk (or the length of one's nose).

Wachovia's commercial loans chargeoff rate during the dot-com bust was 1.24%. However, real estate was not a problem in 2002. Real estate is a massive problem now. And making matters worse, Wachovia levered up at exactly the wrong time, doubling its commercial loan portfolio to $206 billion in the last 5 years.

Office vacancies are now rising, lease rates are falling, and unlike 2002, the Shopping Center Economic Model Is Now History.

Here are some recent high profile bankruptcies Wachovia was involved in: Mervyn's, SemGroup, WCI. One might expect a dozen more before this is all over.

And when it comes to expected writeoffs this cycle, it's $500 billion down and $1.5 trillion to go.

Wachovia (WB) Bank Daily Chart

(Click on charts to enlarge.)

The key to survival for Wachovia is to raise capital now, before the above chart turns into something that looks like this.

Fannie Mae (FNM) Daily Chart


 

Those charts are amazingly similar, aren't they?

My Suggestion For Wachovia

"Raise capital now when you can, for as much as you can, if indeed you even can. Because if you don't you may end up like Washington Mutual, unable to raise capital at all."

See Death Spiral Financing at WaMu, Merrill Lynch, Citigroup for more on WaMu's inability to raise capital.

Here's the deal. The Fed and the Treasury are highly unlikely to go to the same lengths to bail out Wachovia as they did Fannie Mae (FNM) and Freddie Mac (FRE). Alt-A and commercial loan problems at Wachovia are poised to skyrocket. This could be Wachovia's last chance to raise a significant amount of capital in an equity deal and/or by unloading some assets it should never have bought in the first place.

Comments

[Phi009:]

You are an idiot. You are sensationalizing things to make a name for yourself. Wachovia in no way took advantage of elderly clients. WB also did not actively take part in a money laundering scheme. When running a bank, you discover unsavory depositors at times. WB took swift action to close the accounts of the poeple responsible for these two random things that surfaced at the same time as the rest of this mortgage crisis. The employees involved also had swift action taken against them. Also, what justifies your comment in cutting corners on loans? Do your own research and get the facts before you publish a rediculous blog like this.

2008 Aug 13 11:58 AM

[bbzz24:]

Mr. Shedlock,
Be very careful what you are saying as Big Brother (SEC) is watching guys like you who are badmouthing primary broker/dealers.

2008 Aug 13 12:24 PM

[fatcat:]

Spot on, Mish..

2008 Aug 13 12:31 PM

[Still Renting:]

Me thinks some commenters here do protesteth too much.

2008 Aug 13 01:43 PM

[neeb??:]

Interesting issue. Some people here say that anything that might be critical of the banks are potentially bad for the banks. If you have someone breaking the law and you have someone else smelling something off and that someone speaks to this issue that there is something not right,then what? Whether the bleaters like it or not, there is a 'moral imperitive' to say something about this, especially if that someone could potentially be 'in the know'. I have a feeling that the NY law some are mentioning is now being used to 'protect' those who could be doing these miserable things right as we type or whatever.
Do we want to see this occur? Or could we even be seeing this occur right now,even?

2008 Aug 14 11:37 AM

[Faith:]

I have been reading up on Wachovia and this is not the first time I hear about thier problems. Here's one of the things they plan to do to help thier crises.
Wachovia, America's fourth-biggest bank, has already announced plans to cut around 10,700 jobs from the firm and reduce overall expenses by $2 billion over the next year and a half, as it battles to restore its balance sheet. The firm has already reduced its retail mortgage staff by 2,000 so far in 2008, with 4,400 more to be cut from the unit over the next year.
Thank you Michael for keeping us informed

2008 Aug 15 07:50 PM