ChristianR

Wachovia: Lower Rates Are Working

Let's do the math.

Even if Wachovia had a 20% problem rate (above what is already taken into account which is already significant), 20% of 120 billion (round number) is 24 billion. When they write something off, that doesn't mean it goes to zero. It means they foreclose. Suppose these loans are 95% LTV (initial value at origination). So the 24 billion represents 25.2 billion of original value (24 billion / 0.95). If they sell at a 30% discount to their origination values in the past 3 years (since those are most likely to be the ones in trouble) that means you are talk about 17.7 billion in value (25.2 billion * 70%).

This would put the write-off at around 7 billion. That is a catastrophic scenario and would require something of Great Depression proportions.

Even if it did occur, 7 billion would certainly be a big hit, but WB made almost that much in 2007 which means it would be painful, but not something that would be as bad as people are fearing now.

Just to be clear: I do not think this will happen and am only going through the exercise to make the point that even in the scenario above, it would not be the end of the world or even close for WB. It might wipe out a year's worth of profits, but companies have been through much, much worse and done fine once it was behind them.

The perspective is way out of line here in my opinion - Todd S is right.