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Wachovia quarterly loss is massive

Its 2006 acquisition of Golden West is cited in the $23.9-billion quarterly deficit.

October 23, 2008|E. Scott Reckard | Reckard is a Times staff writer.

Wachovia Corp. reported a $23.9-billion third-quarter loss Wednesday, the largest loss at any bank since the financial crisis began, reflecting the company's terrible timing in acquiring California-based mortgage lender Golden West Financial Corp. two years ago.

Charlotte, N.C.-based Wachovia, which is being taken over by Wells Fargo & Co. after nearly collapsing last month, reported a host of problems.

By far the biggest contributor to the loss was an $18.7-billion charge to account for the eroded value of the company's acquired businesses, mainly Golden West, the $24-billion purchase of which Wachovia completed in October 2006 as housing prices peaked.

Oakland-based Golden West, which owned World Savings, was a pioneer in pay-option adjustable-rate mortgages, known as option ARMs, which allowed borrowers each month to opt for a payment so low that the loan balance went up instead of down.

The company's loan portfolio appeared healthy when Wachovia inherited it, but began to spill red ink as the housing downturn intensified.

Gerard Cassidy, managing director for bank equity at investment bank RBC Capital Markets, described the Golden West acquisition as a horrific debacle -- "without a doubt, the worst bank acquisition I have seen in 30 years."

Wachovia's results were far worse than Wall Street expected. It was the largest loss at any bank since the financial crisis began and possibly the largest quarterly loss ever, Cassidy said.

In other signs of trouble, bad loans on the company's books jumped 21% during the quarter, deposits from business customers plunged and the bank recorded $2.5 billion in losses related to financial market disruptions such as the failures of Lehman Bros. Holdings Inc., Freddie Mac and Fannie Mae.

Wachovia added $6.6 billion to provisions for credit losses because of the weak economy and battered housing markets in California and Florida. Losses on car and construction loans jumped sharply.

"The credit is worsening at a pace I had never expected," Keefe, Bruyette & Woods analyst Jefferson Harralson said.

The bank said it tightened lending standards on car loans and slashed the volume of auto loans originated by 30% from the second quarter.

Other lenders have taken similar steps. The reduction in auto lending could partly be the result of fewer people looking to buy a car, but it also sheds light on why consumers are complaining of difficulty financing car purchases.

Wachovia's net loss, amounting to $11.18 a share, compared with a profit of $1.6 billion, or 85 cents, in last year's third quarter. Wednesday's loan losses fell within the range that Wells Fargo said it expected when it announced this month its $15-billion deal to buy Wachovia. Wells Fargo outbid Citigroup Inc., which had thought its $2-billion offer for large parts of Wachovia was a done deal, blessed by regulators as a way to save the North Carolina bank from insolvency.

Wachovia shares fell 6.2% on the report. Wells Fargo fell 4.1%

Despite Wachovia's woes, San Francisco-based Wells Fargo will benefit by acquiring "the finest consumer bank in the nation" as measured by customer satisfaction surveys, Ladenburg Thalmann bank analyst Richard X. Bove said in a note Wednesday.

The deal is expected to close in December.

Before it was taken over by Wachovia, Golden West had appeared to manage the risks of option ARMs brilliantly. In 1994, when California's last housing downturn hit bottom, Golden West charged off as uncollectible just 0.18% of its option ARMs. In the latest quarter alone, Wachovia charged off 2.69% of its option-ARM portfolio

Wachovia paid $24 billion for Golden West -- about the same amount as Wachovia's net loss disclosed Wednesday.

Herb and Marion Sandler, longtime co-chairmen of Golden West, owned 10% of the company. They since have devoted themselves to philanthropy, including funding ProPublica, a nonprofit investigative news organization. The Los Angeles Times has run articles produced by a joint effort with ProPublica.

In an interview Wednesday, Herb Sandler said Golden West used the same standards for option ARMs in 2006 that it had used for 25 years.

He attributed heavy losses on the loans to unprecedented home-price drops of as much as 50%.

"I don't care who you are," he said, "If you're a residential lender you're going to see significant losses when home prices drop 50%."

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Ken Bensinger contributed to this article. Reckard and Bensinger are Times staff writers.

scott.reckard@latimes.com

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