Wachovia Will Burn Your Portfolio

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Once treasured by investors as stable sources of dividend income and long-term capital appreciation, bank stocks have morphed into some of the most toxic equities on Wall Street. Despite this precipitous decline, I continue to urge family, friends, and readers alike to take their bank shares and sprint to the nearest exit.

Considering the company's absolutely terrible second-quarter results, the specter of legal entanglements, and indications of further losses ahead, I remain particularly concerned for shareholders of Wachovia (NYSE: WB  ) .

Erasing an atmosphere of palpable relief after less terrifying results from Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) , Wachovia zapped investors last week with a $9 billion loss -- 438% worse than industry analysts had feared. The result included a $6.1 billion goodwill charge relating to the ill-timed acquisition of Golden West.

No goodwill for investors
Goodwill is an ironic oddity of the accounting world; it treats the amount a company overpays for another company as an intangible asset. If the acquired asset loses value, as Golden West's $122 billion portfolio of pick-a-payment mortgages has, then a buyer must concede the loss and begin writing down the "asset." Along with the mark-to-model accounting, which continues to disguise the true extent of derivatives losses, prevailing accounting practices alone are reason enough to avoid a stock like Wachovia.

If you still don't believe Wachovia will burn your portfolio, consider that the St. Louis headquarters of subsidiary Wachovia Securities was inspected recently by regulators from several states seeking documents about auction-rate securities. Following the collapse of the $330 billion market for these investment vehicles, Wachovia was named in a class action lawsuit in New York in March, alleging the company misrepresented the securities as "suitable alternatives to money market mutual funds." Wachovia will not be alone in defending such claims. NY Attorney General Andrew Cuomo sued UBS (NYSE: UBS  ) last week, charging similar allegations.

I can't see any road to recovery for Wachovia shares, nor for those of beleaguered competitors like Washington Mutual (NYSE: WM  ) and National City (NYSE: NCC  ) . The addition of $5.6 billion to loan loss reserves serves as an eerie harbinger of trouble ahead. With analysts like Oppenheimer's Meredith Whitney continuing to state that the worst for banks is yet to come -- including losses from consumer credit to rival that from housing -- I hope Fools have taken the necessary precautions.

CAPS All-Star ww2004 sounded the alarm in May with the following bearish pitch:

There is a lot of speculation that the worst of the credit crisis is over. If sub-prime were the only concern that might be true but the next wave will be prime borrowers with option ARM loans. Golden West, now part of Wachovia, created the option arm and has billions of dollars of exposure, much of it concentrated in hard hit California.

Using Motley Fool CAPS as a gauge, we can see that many individual investors are appropriately spooked by Wachovia shares, awarding it only one star out of five. More than half of the 564 All-Star members who've rated Wachovia believe it will underperform the S&P 500. Among all CAPS players, however, only 35% with an opinion about Wachovia expect the company to underperform. If you'd like to help steer fellow investors away from this troubled bank, join the free CAPS community and share your insight today.

More than 110,000 individual investors call Motley Fool CAPS their financial home on the web. For developing and testing investment strategies, and discussing ideas with a talented community of Fools, CAPS has no equal.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He certainly owns no bank stocks. Bank of America is a Motley Fool Income Investor recommendation. The Motley Fool has a gilded disclosure policy.


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  • Report this Comment On July 10, 2009, at 2:46 PM, silverminer wrote:

    For the record, WB traded above $17 on July 30, 2008, and bottomed below $2 before ending its corporate life in the $5 range at the end of the year.

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