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:

• Do You Still Own This Garbage?
• Great Call on Wachovia! What's Next?
• Wachovia's Bleeding Continues