Wachovia Loses $8.9 Billion in Second Quarter

Wachovia Corp., a big name in American banking and mortgages, announced yesterday that it had lost $8.86 billion in second quarter 2008. In response, the bank is cutting its dividend by 5 cents a share to 32.5 cents. About 6,400 jobs will go, and 4,400 vacancies will go unfilled. It’s been a tough start for the new CEO, former Treasury Undersecretary Robert Steel, who has had the job two weeks.

Chairman Lanty Smith issued a statement that read in part, “These bottom-line results are disappointing and unacceptable. While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility.” He kind of had to say that. The stock is down 65% since January, trading at 1991 levels, and it’s the second-worst performance on the 24-company KBW Bank Index – the worst is National City in Ohio.

Wachovia got hurt most by its acquisition of Golden West Financial Corp. back in 2006. Wachovia paid $25 billion for a company that specialized in exotic mortgages. The biggest headache came from Golden West’s “Pick a Payment” loan program, which allowed borrowers to pay less than the monthly accrued interest on the mortgage. Not surprisingly, these loans went bad more frequently than any other variety. Wachovia discontinued the program not long ago.

Wachovia has announced a few measures beyond that to right the ship. First, it is exiting the wholesale mortgage market. Second, it is ending all business with mortgage brokers. Third, it has hired Goldman Sachs to analyze its loan portfolio to come up with some options.

One of its best options is the sale of Wachovia Securities, which is one of the nation’s biggest retail brokers. This business is profitable with $2.15 billion in revenue in the first quarter and $332 million in earnings. It would be easy to spin off as a stand-alone. However, the parent company said, “Wachovia Securities has been and continues to be one of Wachovia Corporation's best performing businesses. It is a core business for Wachovia and integral to our long-term strategy. Wachovia Corporation is firmly committed to our retail brokerage business and has no plans to sell it.”

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