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Wipeout! Wachovia Posts $23.7 Billion Quarterly Loss

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Wow. I am going from memory, but I am pretty certain that this is the mother of all quarterly financial services losses. And remember, Wachovia is merely a pretty big US bank, not a global capital markets behemoth like UBS, Deutschebank, or Citi.

From the Wall Street Journal:

Wachovia Corp. swung to a large third-quarter loss, as the bank posted $18.8 billion in goodwill write-downs and $8.71 billion in other charges and costs related to market disruption, investing and other crisis-related losses.

The Charlotte, N.C.,-based bank posted a net loss of $23.7 billion, or $11.18 a share, from a net profit of $1.62 billion, or 85 cents a share, a year earlier. The latest results include the goodwill write-downs, as well as $4.8 billion in charges to build credit reserves, $2.5 billion in market-disruption losses and $1.1 billion in costs from auction-rate securities buybacks, support for funds exposed to Lehman Brothers Holdings Inc. and exposure to government-sponsored entities.

Revenue fell 23% to $5.77 billion.

The results shed more light on how Wachovia’s condition became so bad last month that federal officials agreed to back a takeover by Citigroup Inc. after concluding that a potential failure posed a threat to the already-fragile U.S. financial system. The deal was scrapped when Wells Fargo & Co. came in with a much higher offer that required no government help.

Still, Chief Executive Robert K. Steel said, “Although this has been a challenging quarter, Wachovia’s underlying businesses remain solid and our franchise exceptionally attractive.”

Why does that remind me of Herbert Hoover’s remark, “The fundamental business of the country… is on a sound and prosperous basis”?

Further tidbits from Bloomberg. Note the considerable disparity between analysts’ expectations and the results announced:

The third-quarter loss was $23.9 billion, or $11.18 a share, compared with net income of $1.6 billion, or 85 cents, in the same period a year earlier, the Charlotte, North Carolina-based company said today in a statement. The loss was $2.23 a share excluding one-time items, versus the average loss estimate of 2 cents from 16 analysts surveyed by Bloomberg…

The bank wrote off $810 million in option adjustable-rate mortgages, up from $508 million in the previous quarter. Borrowers are not paying interest on about $9 billion of the loans, or 7.6 percent of the total outstanding.

Wells Fargo expects a cumulative loss of $26 billion from option ARMs, with more than 90 percent of those credit costs to be incurred by the end of next year. Steel in September estimated such losses would reach about $14 billion. Option-ARMs, which Wachovia no longer offers, allow borrowers to defer part of their interest payments, boosting the principal.

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25 comments

  1. Anonymous

    The loss was $2.23 a share excluding one-time items, versus the average loss estimate of 2 cents from 16 analysts surveyed by Bloomberg…

    Estimates produced how many months’ deep into the mortgage and financial crisis?

    This is a reasonable benchmark for the credibility gap between the financial industry’s consensus predictions and actual performance.

    People really need to start stockpiling food at home.

  2. cent21

    Could be a bit of piling on after the merger, to book losses. The current incentive for Wachovia accounting may be to get the bad news behind them and set the stage for upside later.

  3. a

    Isn’t this all just to lay the groundwork for lots of tax credits for Wells Fargo? The real loser here should be the U.S. Treasury.

  4. Art

    It may be so cent21, but this is once again greed is good approach from them. Because investors will be VERY affraid to enter markets again after such a write down, and start questioning if same thing is true for other banks. So yes, they might do it for themselves, but the flight will be from the whole world.

  5. tompain

    $19 bil of that loss was just the writedown of goodwill associated with being acquired at what will turn out to be a bargain price for WFC. The hyperventilation over the headline number is not warranted.

  6. Anonymous

    Is that why WFC took the golden Kool-Aid from Hank Paulson? Allegedly didn’t need more capital, then got religion when Wachovia showed them the books.

  7. Michael Comeau

    Oh that loss isn’t a problem, just add it to the bailout cost. Once you get near a trillion bucks a few billion can easily be squeezed in without anybody noticing!

  8. Anonymous

    10:26, no one is going to turn down low cost preferred from the government when the government is in the business of confiscating shareholder equity whenever it arbitrarily determines some boundary of weakness has been crossed

  9. alex

    Does this mean that when WFC bought Wachovia, their accountants said that $19b of Goodwill that Wachovia had on its books was worthless?

  10. S

    Wachovia took the goldenshower today with the $19B w/d. Eery majro bank should be trading lower on this as the market begins to realize that the only real measure of worth is Tabgible BV. Citi is rapidly mioving toward it, but BAC WFC and JPM continue to levitiate. WFC/JPM/BAC TBV 10/20/15? a trational person ahs to ask themselves if that “goodwill” is anything other than a fictitious asset? Across the entire bank universe the TBV is approx 50% of current BV (the uiverse trades about 1x). what it says is that the massive fee generating consolidation was essentially a running in place exercise. About par for wall street.

  11. Don

    Don’t worry. They have TARP.

    It doesn’t get much clearer than this that our credit stimulus plan without a stimulus was negotiated by the government with far too generous a deal. From the Washington Post:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/21/AR2008102102520.html?hpid=topnews

    “When the Treasury’s program was announced last week, some bank executives said they didn’t need the money and resented the federal intrusion. But in a number of earnings calls and interviews in recent days, several bank executives were more receptive.

    The federal deal is relatively sweet in financial terms — it requires banks to pay 5 percent interest annually on the investment over the first five years — and some bankers said they would not pass it up.

    A number of local banks are strongly considering applying for the Treasury program.

    Virginia Commerce Bank, which has 26 branches and $2.2 billion in deposits, said it is looking to add $25 million to its capital base by the end of the year. In the past, the company said it was considering issuing stock to raise that capital, but the bank said yesterday that it may apply to the Treasury’s program.

    “Quite frankly, it is a very attractively priced alternative,” chief executive Peter A. Converse told analysts.”

    How about this, from the NY Times:

    http://dealbook.blogs.nytimes.com/2008/10/21/gmacs-hope-lies-in-future-as-a-bank-hedge-fund-says/#comment-382536

    “Only a week after the government announced $250 billion in capital for banks, some investors are getting creative in their suggestions on who should qualify.

    David Bullock, managing director of Advent Capital Management, wrote a letter to the chief financial officer of GMAC on Tuesday, suggesting that the former General Motors financing arm turn itself into a bank holding company so that it can grab some of the cash.
    In Europe, Mr. Bullock pointed out, parts of the auto industry are benefiting from bank rescue.plans. So why not in the United States?.”

    I’m not making this up. Here’s my comment:

    “Only a week after the government announced $250 billion in capital for banks, some investors are getting creative in their suggestions on who should qualify.

    David Bullock, a hedge fund manager in New York, wrote a letter to the chief financial officer of GMAC on Tuesday, suggesting that the former General Motors financing arm turn itself into a bank holding company so that it can grab some of the cash.”

    Come on ! How onerous can the terms of TARP be that people who don’t need it are starting to line up to receive it? What more proof do we need that the government negotiated a terrible deal for the taxpayer?

    The next thing we know, Google and Apple will be turning themselves into banks. Can I have myself declared to be a bank?
    — Posted by Don the libertarian Democrat

  12. tompain

    Alex

    What it means is that once you have decided to sell the entire company for $7, you have placed a new value on the business. If that value is way below the book value, something has to be written down. WFC basically didn’t pay up for the goodwill, so it has to get written off. That doesn’t necessarily mean it has no value to WFC, but it definitely has no value any longer to WB holders. If it does turn out to have value to WFC, it will eventually be reflected in the fact that WFC’s ROE will look high.

  13. Cool Head

    I smell another scam here. The so called “goodwill writedown” is either an attempt to artificially show a much higher loss to get a bigger pie of the bailout cake, or it means that Wachovia was used to cooking its books and now is forced to show its actual hand of cards (actually a house of cards) before the takeover by Wells Fargo. Everybody’s seem to be jumping on the gravy train. Hey! Wait for me! I want to get on too…but sadly I am not a bank :(

  14. doc holiday

    Re: Wachovia Corp. on Wednesday reported a staggering $24 billion loss as it took a goodwill impairment charge of nearly $19 billion ahead of its acquisition by Wells Fargo & Co.

    I'm still amazed that no one in the investing world is willing to take a close look at Buffetts $30 Billion in goodwill and connect the dots of Level 3 Asset distortion. Buffett is treated is continually with kid gloves and no one dares look at his books, because the sweet old guy is such a trustworthy legend, who can do no wrong. If you believe that shit, maybe you should buy into his goodwull and say a few prayers!

    Bah Humbug!

  15. tompain

    Doc-

    Anyone who acquires publicly held companies will have goodwill. Particularly if they buy publicly held companies with brand names or other intangible assets. I have never heard anyone suggest that Warren overpays for the companies he acquires, but that’s basically what you are contending if you think his goodwill is phony. You could be right. Probably not, though.

    Cool head – don’t be so paranoid. This writedown is effectively nothing more than a restatement of the announcement that WB was being purchased for $7. From that moment on, this writedown was inevitable.

  16. Mara

    I think the entire concept of goodwill, as currently employed, is a load of crap. Goodwill is the caulk holding together otherwise awful balance sheets. Take a look at finance.google.com where you can check out the income statements and balance sheets of any traded company. Take a look at the goodwill amount. Note when goodwill’s rising as the company’s true income is sagging. BofA is a great example. Do they really have $90 billion in goodwill?! You could make an argument for the value of goodwill in a company like Coca Cola, as people will still want Coke over Cheapo soda and happily pay more. That’s goodwill. Not as a manhole cover for the black hole that net income’s been sucked into.

  17. tompain

    Mara, the ability to gather cheap deposits is just as good an intangible asset as a brand name

    Goodwill is just an accounting creation. It’s not worth the attention being given to it. It has little effect on anything in the real world.

  18. patrick neid

    They made the worst trade of the century when they bought Golden West right at the top of the market in 2006. How bad was that trade for 25 billion? It cost them the entire bank.

    Lord have mercy!

  19. kfunck1

    I’d just like to comment that the positions about goodwill being irrelevant in the announcement are spot on. Of course, you could pay attention to the other numbers, all of which show the dire position the company was in. GW is indeed simply an accounting fiction; its how you make things balance, and as someone commented earlier, exists in almost any merger or acquisition. I would be willing to bet that if you could break down that gw, the majority of the writedown would be out of gw attributed to the Golden West acquisition.

  20. Richard Kline

    It’ll end in Tiers collapsing, and not just at Crashovia.

    Goodwill has indirect importance in that it is a simulacra of how the credit markets view an organizations status: the more you can get away with claiming, the better your counterparties view you. It’s like saying that your mark is good in a card came; up to a certain level the other players think you can raise it if they push you for so much. Nil for Wachovia says it all.

  21. Richard Kline

    Oh, and s at 11:30, I _totally_ agree with you. Fictions should be zeroed out at every financial, but a few are still being given irrational faith by the rest of the markets. Goodwill doesn’t get you on the last jumbo jet out of Financial Saigon; only cold hard assets punch that ticket.

  22. kfunck1

    I think you can make that same comment about GW in general, there’s no reason to limit it to just financial companies. Unfortunately, unless you know of another way to write up assets to a value other than their fair value, tis difficult to account for. Goodwill really doesn’t have anything to do with how the credit markets view you either, since it’s entirely at the discretion of the company to revalue it (since its intangible and all).

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