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Wachovia takes huge losses

When the bank, Wachovia Corp was tossed up in a competing battle between Citicorp and Wells Fargo (where Citicorp won the initial endorsement of the Federal Reserve for control of the troubled Wachovia and then Wells Fargo stepped in with a far better deal, better for Wachovia, better for US taxpayers and for the Federal Insurance Fund), there was some puzzlement over why a fairly strong bank such as Wachovia found itself in this position. Actually, not totally correct, since with the negative sentiment, toppling over of any institution was not seen as surprising, but people were puzzled as to why the bank found itself in such a position. Well, Wachovia’s results make it very clear as to the reason for this:

Wachovia Corp. (WB) on Wednesday reported a heavy net loss of $23.7 billion in the third quarter, driven by large one-time charges of $18.8 billion ahead of its planned fourth-quarter merger with Wells Fargo & Co. (WFC). The troubled Charlotte, N.C., bank, whose fate was recently thrown into limbo as it courted two potential suitors, provided ample detail of the crumbling condition that finally pushed it to sell itself. Wachovia’s loss of $11.18 a share marked a steep drop from prior-year net income of $1.62 billion, or 85 cents a share.
Wachovia reported outflows of deposits from both retail and commercial customers, as well as sharply rising losses from its $120 billion portfolio of so-called Pick-A-Pay mortgages. It said total losses from its Pick-A-Pay loans, which allow some borrowers to increase their loans’ balances by paying less- than-full monthly interest payments, could now total 22% of the portfolio.

In a reverse of the phenomenon where retail investors pull their holdings out of the bank if they feel that the bank was in trouble, in this case, it was the businesses who held commercial deposits at the bank who pulled out in the last quarter, while retail investors mostly held onto their deposits. Wachovia currently seems to have hit rock bottom with these huge losses (that include write-offs), and speculation is that things can only improve with the bank from this point (especially with the planned merger with Wells Fargo).

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