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Terrible, Wachovia, Absolutely Terrible

Well, so much for this week's better-than-expected bank earnings.

Wachovia (NYSE: WB  ) swung to a second-quarter net loss of nearly $9 billion, or $4.20 per share, pummeling analyst estimates of a $0.78-per-share loss. Some good news, though: Not all losses are created equal. More than $6 billion of the loss was related to non-cash goodwill charges that won't affect tangible capital ratios.

Adding to the fray, Wachovia added $5.6 billion to loan loss reserves -- $4.2 billion of which was set aside for future losses. Revenue came in at $7.5 billion, down 14% from last year. As if the losses were some sort of sacrificial offering to the investment gods, shares surged 27% on the news.

Anything left for me?

Wachovia slashed its dividend by 87% -- the second cut in three months -- down to $0.05 per share. The move will save around $700 million per quarter, which is great news for the company, but bad news if you're a shareholder wishing the recent pounding of Wachovia stock was just a figment of the market's mood.

The other big news of the day is that Wachovia is jumping ship on its wholesale mortgage origination channel -- an extension to its earlier announcement that it would cease to offer the Pick-a-Pay mortgages pioneered by Golden West Financial, the alternative-mortgage juggernaut Wachovia bought for $25 billion at the height of the real estate boom. Easy come, easy go.

I'll say it again
Nobody likes to beat a dead horse, but OK, I'll do it anyway. Wachovia's acquisition of Golden West Financial might go down as one of the worst investments in banking history. As of Dec. 31, Wachovia was holding some $15 billion worth of goodwill related to Golden West. Now that the Pick-a-Pay mortgage phenomenon has gone up in smoke, how much more goodwill will end up becoming goodwon't? In reality, perhaps all of it. And that could mean more gargantuan writedowns to come, while other big banks begin to crawl out of their holes.

That's a serious price to pay right now. Rivals Wells Fargo (NYSE: WFC  ) and Bank of America (NYSE: BAC  ) came through with results that reassured fretful investors. Amid the chaos currently consuming the bank sector, companies have become more polarized that boys and girls at a 5th-grade dance. There're "good" banks on one side -- Wells Fargo, Goldman Sachs (NYSE: GS  ) , US Bancorp (NYSE: USB  ) , maybe even B of A -- and bad banks on the other -- Washington Mutual (NYSE: WM  ) , National City (NYSE: NCC  ) , and unfortunately, Wachovia.

Bottom line
That doesn't mean Wachovia's facing imminent doom or disaster. But let's view the banking industry from above: There's a lot of uncertainty right now. Things could get much worse before they get any better. Investors bent on staying in banking would be wise to stick to banks with at least a smaller mess on their hands. Wachovia isn't one of them.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. US Bancorp and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On July 23, 2008, at 4:27 PM, jloschi1 wrote:

    Are you some sort of a monkey? It's loan exposure in certain geographic market location and not loan products that are causing write-downs for many banks. You make no comment about the morons that refinanced and pulled cash out of their home or the ubiquitous over extention of Home Equity Lines of Credit. An idiot might ask, "What's the difference between an ELOC and a pay-option loan?" Well Wachovia's pay-option products have a lower default rate than equity lines in the same regions. Why? Becasue, they didn't extend credit to the high loan to percentages that their competitors, such as JP Morgan Chase. There is no difference between minimum payment options, cash-out refinances, or Home Equity Lines of Credit. Stop pointing fingers at specific causes. This"melt-down" is predicated upon the lack of accountability and speculation from Borrower's, Mortgage Brokers, Appraisers, Lending Institutions, Secondary Markets, Regulators, Investment Banks and lastly the investors holding final product. It's not the loans that were dangerous. The Market was dengerous and volatile. If you borrow money to buy stocks and stock market goes down, who's fault is that? From your perspective, If I leant you the money, then it would be my fault. That makes perfect sense. Oh wait wait, no it doesn't.

  • Report this Comment On July 24, 2008, at 10:16 AM, mandrake66 wrote:

    Hi Morgan, just wanted to say that I've been reading your articles for months and have always found you to be spot on in your comments and analysis.

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12/31/2008 4:03 PM
WB.DL2 $5.54 Down +0.00 +0.00%
Wachovia Corp CAPS Rating: **
BAC $16.65 Down -0.03 -0.15%
Bank of America CAPS Rating: ****
GS $174.87 Up +0.20 +0.11%
Goldman Sachs CAPS Rating: ***
NCC.DL2 $1.81 Down +0.00 +0.00%
National City Corp CAPS Rating: *
USB $44.00 Up +0.15 +0.33%
US Bancorp CAPS Rating: ****
WAMUQ.DL $0.00 Down +0.00 +0.00%
Washington Mutual,… CAPS Rating: No stars
WFC $45.39 Up +0.30 +0.68%
Wells Fargo CAPS Rating: ****