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Executive shake-up at WaMu, Wachovia

June 03, 2008|E. Scott Reckard | Times Staff Writer

The mortgage meltdown scorched the executive suites of two more banks Monday as Wachovia Corp. fired its chief executive and Washington Mutual Inc. knuckled under to shareholders and stripped its CEO of his chairman's post.

Charlotte, N.C.-based Wachovia and Seattle-based WaMu are prominent in California retail banking and are big players in home loans, on which they've lost billions. Their shake-ups helped rattle the stock market, sending a bank share index to a five-year low, as investors worried about more fallout from the mortgage crisis.

The Dow Jones industrials sank more than 200 points before recovering to close at 12,503.83, down 134.50 points, or 1.1%.

Wachovia, which ousted CEO G. Kennedy "Ken" Thompson on Monday, muscled into California by buying adjustable-rate mortgage giant World Savings of Oakland in 2006, just as the housing market peaked. It lost $393 million in the first quarter and slashed its dividend by 41%. It also raised $7 billion in new capital -- strengthening its balance sheet but diluting the stakes of existing shareholders.

But mortgage losses weren't the only troubles faced by Thompson, who was stripped of his chairman's title May 8.

Wachovia agreed to pay $18.9 million in April to federal bank regulators to settle a probe into allegedly improper telemarketing to customers, many of them elderly. And the Securities and Exchange Commission is investigating its marketing of auction-rate securities -- investments that were supposed to be safe and easily tradable but have had a hard time finding buyers amid the credit crunch.

Wachovia tapped its new chairman, Lanty Smith, to serve as interim CEO and also named an interim chief operating officer.

In a statement, Smith said no single event had triggered Thompson's firing. He instead cited "previously disclosed disappointments and setbacks," which "cumulatively have negatively impacted the company and its performance."

As a result, Smith said, "The board believes new leadership will help to revitalize and re-energize Wachovia and enable it to realize its potential."

Smith has been a Wachovia director since 1987 and was lead independent director from 2000 until he was named chairman last month. He also has been a private equity and venture capital investor for the last two decades, Wachovia said.

Its shares fell 40 cents Monday to $23.40, down from a 52-week high of $54.95.

WaMu, where CEO Kerry Killinger lost his chairman's title, is made up largely of former California savings and loans acquired as Killinger built the nation's largest S&L.

The company posted a first-quarter loss of $1.14 billion and slashed its dividend from 15 cents to 1 cent a share. It also was forced to dilute the holdings of its shareholders, accepting a $7-billion capital injection from private investors.

Shareholders at WaMu's annual meeting in April approved an advisory resolution asking for the chairmanship to be separate from the CEO job. WaMu's board had opposed the resolution but yielded to the affirmative vote.

"We believe this is a clear acknowledgment of important failings by Mr. Killinger and the board in managing risk to shareholders," said Steve Abrecht, executive director of a Service Employees International Union retirement trust, which owns WaMu stock.

Its shares fell 2 cents to $9, down from a 52-week high of $44.60.

In getting the boot from Wachovia, Thompson, 58, a 32-year Wachovia veteran, joins a bankers' ex-CEO club that includes Stanley O'Neal from Merrill Lynch & Co. and Charles Prince from Citigroup Inc., who were shown the door after their banks recorded huge losses stemming from bad mortgages.

Under Thompson, Wachovia agreed to pay about $25 billion for World Savings parent Golden West Financial Corp. just before the mortgage markets began crumbling.

The deal has been widely criticized, particularly because World specialized in a controversial loan known as an option ARM -- an adjustable-rate mortgage that gave borrowers the choice of paying so little that their balance went up instead of down. Defaults on option ARMs, including those in Wachovia's portfolio, have shot up as home prices have fallen.

Thompson had staunchly defended the deal, in part because it expanded his bank's mortgage business and in part because it gave Wachovia an entry into California, the largest retail banking market in the country.

World Savings had 120 branches in the state and Wachovia has been opening more. "I'm giddy about the opportunity to expand in California," Thompson said in November 2006, speaking at the Jonathan Club in Los Angeles.

He couldn't be reached for comment Monday. In an early morning call with investors, interim CEO Smith said no immediate changes in Wachovia's strategies were planned.

Another CEO under fire for a controversial mortgage purchase is Kenneth D. Lewis of Bank of America Corp., which agreed this year to buy foundering Countrywide Financial Corp. of Calabasas, the nation's largest home lender. BofA shares have fallen for four straight months and lost 1.3% on Monday to close at $33.58, a five-year low.

Lewis continued to defend the deal Monday, telling investors that it would provide gains even if U.S. home prices drop by 25% in the next two years, as BofA expects. After acquiring Countrywide, Bank of America will have about a quarter of the U.S. mortgage market and will profit from fees on Countrywide's business of billing and collecting $1.5 billion in mortgages, Lewis said in a call with investors.

"We don't have our heads in the sand" regarding the housing market, Lewis said.


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