Banks' Health Questioned as Wachovia Posts $8.9 Billion Loss
Washington Post, July 7, 2008

Concerns about the health of the nation's banks continued to mount yesterday as Wachovia and SunTrust -- two of the most active in the Washington region -- as well as other financial institutions disclosed they were still being pounded by the mortgage crisis.

But frank remarks from top executives about the extent of those difficulties also encouraged analysts and investors that some of the firms may be getting a handle on their troubles, setting the stage for a turnaround.

Wachovia headlined the series of dismal earnings reports yesterday, saying it would lay off 6,350 employees and leave 4,400 more positions unfilled while posting a record $8.86 billion loss in the second quarter.

Wachovia, which holds more deposits in the Washington region than any other commercial bank, said it was taking steps to conserve cash. The firm slashed its dividend by 87 percent, saving $700 million per quarter. It is also seeking to sell some assets outside its core banking business and is increasing its reserves to cover future losses by $4.2 billion.

The bank's loss amounted to $4.20 a share. Excluding one-time charges, it lost about $1.27 per share. Analysts had expected a loss of 78 cents.

"Our reported results today are clearly a disappointing performance for which we take responsibility," said chief executive Robert Steel, a former Treasury undersecretary whom Wachovia hired July 9. "We are serious about getting on top of these issues quickly, and we believe we have a good grasp of the challenges facing the economy, the industry and Wachovia."

The bank's stock, which initially fell after its earnings report was released to levels not seen since 1991, rebounded and climbed throughout the day to close up 27 percent.

"There's certainly a lot of bad news here," said Russell Walker, a risk management professor at Northwestern University's Kellogg School of Management. "But the investment community appears to be saying that new management has come in, cleared the books and in the context of bad news . . . is taking what appears to be very rational steps."

The stock market also rose, buoyed by a report showing that Hurricane Dolly, which was upgraded from a tropical storm yesterday, in the Gulf of Mexico was veering away from critical oil refineries in Texas. The price of crude oil dropped sharply, by $3.09, to settle at $127.95 a barrel, well off its recent record of $145. The Dow Jones industrial average jumped 1.2 percent, and the Standard & Poor's 500- stock index, a broader measure, rose 1.35 percent.

Wachovia's losses were in line with what bank executives had disclosed earlier this month. What was more surprising, analysts said, was the large amount the bank is setting aside for losses that may come down the road.

The move, considered fiscally conservative, contrasts with the aggressive growth strategy the bank had adopted over the past few years. In 2006, the bank bet big on mortgage lender Golden West, paying $25.5 billion to acquire the company. At the time of the acquisition, Wachovia officials said they were buying a highly profitable mortgage lender. Instead, they became saddled with a lot of loans that are now souring. But several analysts said that after months of being in denial, bank executives are now accounting for the bad bet on Golden West.

"There is a feeling among analysts that it can't possibly get any worse," said Byron MacLeod, a financial analyst at Gradient Analytics. "The new direction is a positive for the company; I think they needed someone to step in and make those hard decisions."

A major question for the bank is how it will make money as it is atoning for its past mistakes, MacLeod said.

In regards to Wachovia's job cuts, spokeswoman Barbara Nate said she expected the effect on the Washington region to be "minimal." The bank has about 1,100 staff members in the area and about 120,000 employees overall.

SunTrust, which has the second most deposits of any commercial bank in the Washington region, had its quarterly profit dwindle 21 percent, to $540 million. The bank has said it does not expect to cut its dividend or raise capital. Its shares rose 16 percent yesterday.

Meanwhile, Washington Mutual, the nation's largest thrift, posted a loss of $3.33 billion. Excluding one-time charges, the bank results equated to a loss of $3.34 a share, while most analysts polled by Thomson Reuters had forecast a loss of $1.04 a share.

During a conference call, executives said their turnaround plan was on track.

"In the face of unprecedented housing and mortgage market conditions, we are continuing to execute on a comprehensive plan designed to ensure that we have strong capital and liquidity, an appropriately sized expense base and a strong, profitable retail franchise," said chief executive Kerry Killinger. "Our recent $7.2 billion capital raise, combined with the other proactive steps we have taken this quarter to strengthen our banking franchise and further expense reductions, continue to move us toward achieving these goals."

Washington Mutual's shares initially rallied on the results, which were released after the regular trading session ended. As of 8 p.m., the stock was down 24 cents after having risen 8 percent in after- hours trading. The stock closed up 6.2 percent, to $5.82, in the regular session.

Russell Walker