Wachovia's woes: "California really is that bad"

Wachovia Corp.’s shareholders must be wishing they could have a "do over" of the bank’s major foray into California: its 2006 purchase of Golden West Financial, the California lender that specialized in so-called option ARMs.

With mortgage loan losses soaring, Wachovia today slashed its quarterly dividend payment 41%, from 64 cents a share to 37.5 cents. The Charlotte, N.C.-based bank also said it raised $7 billion in fresh capital via common and preferred-stock sales to unnamed investors. The stock sales will help shore up the company’s finances, but the move dilutes the stakes of current shareholders.

Not surprisingly, the stock is getting hammered, trading down more than 10% to about $25 with 15 minutes to go in the session. The shares are near their lowest level since 2000.

Golden West’s option adjustable-rate mortgages allow borrowers to pick their own payment plan. The lender, under S&L industry legends Herb and Marion Sandler, was a pioneer in option ARMs via its World Savings unit. Although critics said the loans were dangerous from the get-go, Golden West had a reputation for tougher underwriting standards than its rivals.

But the standards evidently weren't tough enough for this real estate crash: Wachovia today said it lost $393 million in the first quarter after setting aside $2.8 billion for potential loan losses. The provision "largely reflected more severe deterioration in the residential housing market, particularly in specific markets in California and Florida," the bank said.

A headline on a Goldman Sachs & Co. report today on Wachovia put it succinctly: "California really is that bad. Golden West riskier than we thought."

The report, by analyst Brian Foran, said the Golden West loan portfolio was being squeezed by the "unprecedented period of stress" in the California real estate market.

Photo: Jim R. Bounds/Bloomberg News

Comments

[Brian]

I would be interested in seeing a detailed breakdown of the loan losses and write downs. Under Herb and Marion Sandler, Golden West released tremendous amounts of details on their loan portfolio, including FICO scores, LTV's , deferred interest and more. I read an AP article last August where Wachovia's CFO, Tom Wurtz, was contemptuously dismissive of the Golden West disclosures, calling them "boilerplate", and saying that they would release information "when there is something to report". I guess there was something to report this time.

Still, I wonder how much of the losses can be tied to Golden West before Wachovia bought them. I heard that the careful underwriting was thrown out the window once Wachovia took over. Instead of 60% loan to value maximum, they were doing 95%; instead of two years worth of tax returns, stated income was okay. Instead of your own appraisers, it was subcontracted out.

If, as I expect, the problems are more with Wachovia, I wouldn't expect them to release the data. So far, I have not been able to find it. Tom, any information?