Thursday, July 24, 2008

Two troubled U.S. banks each post billions in losses

Two troubled U.S. banks each post billions in losses

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Moving quickly to put an end to the constant spill of red ink, Wachovia, the banking giant, booked an $8.9 billion loss and slashed its dividend in its first quarter under new leadership.

Wachovia said it would also eliminate about 10,750 jobs, including about 6,350 positions, largely in its mortgage business, and another 4,400 contractors and other positions across the bank.

Also Tuesday, another bank, Washington Mutual, reported a second-quarter loss of $3.33 billion or $6.58 a share, compared with a profit of $830 million, or 92 cents, in the period a year earlier.

Washington Mutual said it had increased its reserve for loan losses by $3.74 billion to $8.46 billion in the quarter, betting on more problems with mortgages. In a statement, the bank said that it would not need to raise additional capital, sending its shares higher in after-hours trading.

"We remain confident that we have sufficient capital to successfully manage our way through this challenging period," the chief executive of Washington Mutual, Kerry Killinger, said in the statement.

The bank said it had set aside $5.91 billion for loan losses and had write-downs of $2.17 billion. The bank also said that several executives, including Killinger, would not receive incentive bonuses this year.

At Wachovia, investors had been bracing for large losses since the bank named Robert Steel, a former Treasury under secretary, as chief executive, to help steer it through the housing crisis. At the time, the bank said that it anticipated a loss of $2.6 billion to $2.8 billion on top of an unspecified merger-accounting charge.

But Steel had every incentive to kick off his tenure with a "kitchen sink" quarter as he tries to clean up the bank's problems.

Wachovia reported a second-quarter loss of $8.9 billion, including a $6.1 billion write-off that is tied to overpaying for several deals. The bank set aside another $5.6 billion to cover current and future losses. It also cut its quarterly dividend by 87 percent, to 5 cents a share, in order to conserve about $2.8 billion a year.

"These bottom-line results are disappointing and unacceptable," said Lanty Smith, Wachovia's chairman, who orchestrated the ouster of the bank's former chief executive, G. Kennedy Thompson, in early June. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia also accept responsibility."

Wachovia has faced staggering losses from its ill-timed acquisition of Golden West Financial, a large California lender that specialized in so-called pay-option mortgages. Loans made to builders and commercial real estate developers have started to sour. With the credit markets frozen, it has been forced to take steep markdowns on billions of dollars of unsold buyout loans and complex mortgage investments it holds on its books.

The bank's results were much worse than Wall Street anticipated, a stark contrast to its big bank rivals that handily bested the low targets analysts set. After falling sharply in premarket trading, Wachovia shares ended up $3.61, or 27.39 percent, to $16.79.

Wachovia's revenue fell 14 percent, to $7.5 billion. The bank reported a $4.20 a share loss in the second quarter, compared with a profit of $2.34 billion, or $1.22 a share, in the period a year ago. That figure, excluding the big accounting charge, was in line with the bank's July 9 guidance, but analysts previously had been expecting better results.

Thomson Financial says analysts had predicted a loss of 78 cents a share on revenue of almost $8.4 billion.

Last week, Wells Fargo & Company, JPMorgan Chase and Citigroup reported better-than-expected earnings, causing financial stocks to rally. On Monday, Bank of America also posted stronger-than-expected results. But investors had a gloomier mindset on Tuesday morning, as they digested Wachovia's dismal performance as well as poor results from American Express. The credit card company, which caters to wealthier customers, reported a surge in losses and a slowdown in consumer spending.

Wachovia's numbers, however, were much worse. The bank's revenue was essentially wiped out a laundry list of charges. The bank set aside an additional $5.6 billion to raise reserves and cover losses, including about $3.3 billion, stemming from its portfolio of Golden West pay-option loans. It booked a $936 million loss tied to markdowns on complex mortgage-related investments and the bailout of certain Evergreen money funds. It also booked a $391 million loss in anticipation of unloading certain investments at steep discounts and recorded a $975 million non-cash charge related to potential tax liabilities of certain leasing transactions. The bank added $590 million to bolster its legal reserves from shareholder lawsuits.

At Wachovia, Steel succeeded Thompson, who was ousted June 2. Steel has vowed to keep the bank independent and put it back on track.

"In the short term, the entire organization is focused on protecting, preserving, and generating capital," Steel said in a statement. He said that it was "clearly prudent and necessary" to further reduce it bank's dividend and said the bank was looking to trim expenses, sell assets and reduce its credit-only commercial borrowers to reduce risk.

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