Wachovia's Bleeding Continues

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Once you throw out the kitchen sink, what else can you use to fuel the subprime fire? Just months after Wachovia (NYSE: WB) padded its balance sheet with $8.3 billion of new capital, the aftershocks of its ill-timed purchase of Golden West Financial continue to pull the troubled bank down the tubes.

On Monday, Wachovia announced a first-quarter loss of $393 million, or $0.20 per share, compared to a gain of $2.3 billion, or $1.20 per share, in the same period last year. Revenue declined 5%, to $7.9 billion. But that was just the beginning of a wave of announcements that shed light on just how dire Wachovia's situation has become:

• The bank will raise $7 billion in new capital by selling common and preferred stock. Washington Mutual (NYSE: WM) announced a similar plan last week to shore up its balance sheet. Wachovia's new common shares will be sold at $24 per share, a 14% discount to Friday's closing price. Adding insult to injury, Wachovia already raised $8.3 billion in fresh capital earlier this year.
• Its quarterly dividend will be slashed 41% to $0.375 per share, which management expects will save the company $2 billion per year. Management cited the need to build capital ratios and provide more operational flexibility as the culprit behind the cut.
• The bank wrote down $2 billion in assets, pushing another $2.8 billion into loan-loss provisions -- losses the company expects to endure in relation to bad loans.

"I'm deeply disappointed with our first quarter results," CEO Ken Thompson said, "but I am confident we're taking prudent and appropriate actions in this challenging period to restore Wachovia to a more profitable path."

True, the latest moves will do a great deal to help Wachovia keep its head above water, but the comments may sound insulting to shareholders who've had to endure Thompson's blundering acquisition of Golden West Financial, a California-based mortgage lender littered with ARM loans. Wachovia purchased Golden West for a whopping $25 billion two years ago, near the peak of the real estate bubble that now haunts financial firms.

What's next for Wachovia? Shareholders can only hope the bleeding will relent sometime soon, but if recent market activity is any indicator, investors could face rough sailing for quite some time. Last week, WaMu disclosed it had rebuffed a preliminary offer to be acquired by JPMorgan (NYSE: JPM). Fresh off its fire-sale purchase of Bear Stearns (NYSE: BSC), the House of Morgan still appears hungry for acquisitions. Will Wachovia be the next candidate?

I doubt it. With a market cap around $50 billion, even titanic banks like JPMorgan, Bank of America (NYSE: BAC) or Goldman Sachs (NYSE: GS) would struggle to pony up enough money. Wachovia will likely need to dig its way out of this hole on its own.

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