Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Wachovia Latest to Seek Capital


Mounting mortgage losses force bank to raise cash.


Monday: A good day for big retail banks to announce $7 billion cash infusions. Last week it was Washington Mutual (WM), today it's Wachovia (WB).

After reports of the capital raise emerged this weekend in The Wall Street Journal, Wachovia pushed its first quarter earnings release forward to make public some rather dismal results:

  • Net loss of $350 million, or $0.20 per share, on revenue that fell 4.5% to $7.90 billion. Analysts were expecting earnings of $0.40 per share on revenue of $7.98 billion.

  • Credit loss provisions increased to $2.83 billion from $177 million last year.

  • Nonperforming assets, or loans approaching default, rose to 1.70% from 0.42% a year ago.

  • Quarterly dividend cut to $0.375 per share from $0.64.

  • $7 billion in common and preferred equity sold at $23 to $24 per share, a 15% discount on Friday's closing price of $27.81.

The company's woes stem from a mistimed purchase of one of the housing boom's biggest issuers of Pay Option ARMs in California. Wachovia bought Golden West Financial for $26 billion in October 2006. According to Bloomberg, 60% of Wachovia's $120 billion Option ARM portfolio is located in California.

Option ARMs create negative amortization, which adds to a loan's outstanding balance if the borrower chooses the most affordable payment option. In addition, banks get to report income regardless of the cash flow generated by the loan. Both issues are marginalized when home prices go up and exacerbated when values plummet.

Banks book income on Option ARMs at the fully amortized rate, even if a borrower selects the minimum payment option. For example, an Option ARM carrying a rate of 7% offers the following choices for payment:

  • 7% interest plus principal
  • 7% interest only
  • 1% interest only

If the borrower chooses the lowest payment -- which many do -- the bank still gets to report monthly interest income of 7%. Accounting rules assume the income will eventually be realized, since all back interest is collected when the loan is paid off. However, if the loan defaults and isn't repaid, the cash never materializes.

Banking expert Minyan Peter isn't convinced the recent spate of capital infusions spell a bottom. Professor Sedacca is expecting more of the same in coming weeks as banks look for cash alongside mounting losses.

Hope abounds that the worst of the credit crunch is behind us in spite of growing evidence to the contrary.

For more on the Wachovia and its CEO Ken Thompson, check out Hoofy & Boo's always astute report.

Position in WB

The information on this website solely reflects the analysis of or opin= =3D =3D3D ion about the performance of securities and financial markets by = the wr=3D iter=3D3D s whose articles appear on the site. The views expresse= d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi= a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web= site is intended to con=3D stitute a recom=3D3D mendation or advice address= ed to an individual investor =3D or category of inve=3D3D stors to purchase= , sell or hold any security, or to =3D take any action with re=3D3D spect t= o the prospective movement of the securit=3D ies markets or to solicit t=3D= 3D he purchase or sale of any security. Any inv=3D estment decisions must b= e made =3D3D by the reader either individually or in =3D consultation with = his or her invest=3D3D ment professional. Minyanville write=3D rs and staff= may trade or hold position=3D3D s in securities that are discuss=3D ed in = articles appearing on the website. Wr=3D3D iters of articles are requir=3D = ed to disclose whether they have a position in =3D3D any stock or fund disc= us=3D sed in an article, but are not permitted to disclos=3D3D e the size o= r direct=3D ion of the position. Nothing on this website is intende=3D3D d = to solicit bus=3D iness of any kind for a writer's business or fund. Mi= ny=3D3D anville mana=3D gement and staff as well as contributing writers wi= ll not respo=3D3D nd to em=3D ails or other communications requesting inves= tment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos