Wachovia Bleeding Cash

Robert Steel has his work cut out for him.

Steel, the new CEO of Wachovia (WB), took over last month after the company booted former head Ken Thompson. He's now facing the daunting task of righting a ship that has very much veered off course. The bank’s second-quarter results were nothing short of abysmal. According to The Wall Street Journal, Wachovia reported:
 

• Net losses of $8.7 billion or $4.20 per share, compared with net income of $2.3 billion last year.
  
  
• $6.1 billion in writedowns, largely on mortgage-related assets.
  
  
• Higher loan loss provision of $5.6 billion, up from $179 million a year ago.
  
  
• Charge-offs (loans the company has given up on) now 1.1% of total loans, compared to 0.14% last year.
  
  
• Lowered dividends from $0.375 to $0.05 per share.
  
  
• 6,350 job cuts - 5% of the company’s workforce.

Wachovia, like many of its banking peers, has been blindsided by credit losses. For Minyans with an abacus handy, the higher loan loss provision represents a 3100% increase over last year's, which shows just how unprepared management was for the current financial crisis.

The bank is now squirreling away cash to absorb further losses.

Steel, the former Undersecretary of the Treasury, appears to be taking aggressive measures to insulate the company from a mortgage portfolio that’s likely to deteriorate, as long as the housing market continues to slide. Many analysts point to Wachovia’s ill-timed purchase of Golden West -- one of California's largest Option ARM issuers during the boom -- as the beginning of Wachovia's current crisis. 

However, details of troubles throughout the bank’s business lines continue to emerge, and it’s becoming apparent that the Golden West debacle was only a symptom of a more systemic disease. In fact, Wachovia seems to have had little regard for prudent business practices, including:
 

• Charges stemming from rogue telemarketers ripping off clients total $150 million.
  
  
• A securities division under investigation for its role in the collapse of the auction-rate securities market.
  
  
• A $975 million charge related to a court ruling involving leasing transactions.

Hopeful shareholders may take solace from regarding this as a “kitchen sink” quarter in which the bank confronts its worst-case scenario and writes down assets accordingly. With Steel at the helm, management could plug enough holes to keep the ship afloat long enough to turn it around.

Unfortunately, with revenues falling in most of the bank’s businesses, persistent malaise in the mortgage and real estate markets, and speculation the company may have to sell itself to remain solvent, the future still looks rather bleak.