What was Wachovia thinking?
Posted
Apr 14 2008, 05:33 PM
by
Matt Koppenheffer
The details of Wachovia's first-quarter report were unfortunately familiar enough to border on dull. The quarterly loss was $350 million, brought on by some $5 billion in asset impairment and loan related charges. It's also quickly moving to make sure it has enough liquidity by cutting its dividend and raising $7 billion of new capital.
What's more interesting to consider is the fact that Wachovia, like many of its competitors, steered its financial ship directly toward the oncoming storm in the twilight hours of the housing boom. In May of 2006, Wachovia agreed to purchase Golden West Financial, a huge California savings and loan. Though the S&L was very well respected, the deal was fantastically ill-timed as it gave Wachovia tremendous exposure to the bubblicious California real estate market.
Likestofocus, a member of The Motley Fool's CAPS community, pointed out exactly this back in February and even predicted the need for the bank to raise a truckload of money:
[Wachovia has] billions of charges coming down the pipe due to its massive exposure to ARMs on the west coast and sub prime exposure. There's an even bigger wave of ARMs resetting in 2010 and 2011 than what reset in '08. Combine that with falling house values and tighter lending standards equals not a pretty picture. [It] will need huge equity injection to survive.
If its lending standards and business acumen at acquiring mortgage lenders near the top of the market are a good indication of its style, I shudder to think of what is on its derivatives books.
A few finance chiefs -- including Merrill Lynch's Stan O'Neal and Citigroup's Chuck Prince -- have lost their jobs due to the poor performance from their respective companies. At Wachovia, the current dislocation has led to a dizzying drop in the stock, destroying billions of dollars of shareholder value. In fact, investors that have invested in Wachovia stock any time since late 1995 -- save the very depths of Dotcom crash -- currently hold stock that's worth less than what they paid for it. Yet as of now, its CEO Ken Thompson is still gainfully employed.
Sure, there's a line of argument that says the finance CEO's were trying to maximize profits for shareholders, but when I was growing up that line of reasoning was typically met with the retort, "if everyone else jumped off a bridge would you do it too?"
As shareholders in finance companies are getting ready to vote their proxy cards this year, they should be ready to hold boards and management teams accountable for jumping off that bridge whether or not everybody else is wet.
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