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Wachovia unveils more credit market losses

Wachovia Corp. said Friday the value of collateralized debt obligations in its portfolio fell about $1.1 billion in October, making it the latest financial institution to warn of sharp losses last month in the credit markets.
/ Source: The Associated Press

Another day, more writedowns on Wall Street.

Wachovia Corp. on Friday became the latest major financial institution to warn of mounting losses in the credit markets, saying the value of securities it owns that are backed by loans sank by about $1.1 billion in October.

The nation's fourth largest banking company also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in the housing market in certain regions. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.

Wachovia shares dropped 45 cents to $39.85 in afternoon trading Friday after sinking earlier in the day to a 52-week low of $38.05.

The news heightened fears that the fallout from the subprime turmoil is spreading deeper into credit markets. It also raised questions about the bank's 2006 acquisition of adjustable-rate mortgage lender Golden West Financial Corp. of Oakland, Calif.

"We believe the company is trying to get ahead of likely higher future mortgage losses in California," Deutsche Bank Securities analyst Mike Mayo wrote in a client note. "Per Golden West, it now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle."

Wall Street was never really convinced that the Charlotte bank's $24 billion purchase last year of one of the country's largest mortgage lenders was a smart bet. But over the past year, bank executives insisted the takeover was working out fine. Until now.

While Wachovia didn't mention Golden West in a regulatory filing with the Securities and Exchange Commission on Friday, it did say that "the expected credit deterioration will likely be focused in certain geographic areas that have recently experienced dramatic declines in housing values."

"The most challenging markets of course are in several pockets in California," said Wachovia's Chief Risk Officer Don Truslow during a banking conference in Boston. "We are also watching on our books several pockets in Florida, as well."

Last month, Wachovia took a $1.3 billion hit related to the global credit crunch, depressing earnings by 10 percent to $1.7 billion.

At the time, Wachovia Chairman and Chief Executive Ken Thompson said "trends in mortgage credit are deteriorating faster than we would have expected."

The weakening markets — which Wachovia estimates could get worse over the last two months of the quarter — cut the value of the bank's so-called collateralized debt obligations by more than 60 percent.

As of Sept. 30, Wachovia had $1.8 billion in CDO exposure; after the latest writedowns, the exposure is now $676 million.

CDOs are complex instruments that combine slices of different kind of risk. CDOs are often backed, in part, by subprime mortgages — loans given to customers with poor credit history. While Wachovia does not offer subprime loans, as those mortgages have increasingly defaulted, the value of the CDOs has plummeted.

"Clearly we could have done a better job around subprime," Truslow said. "Yet we found ourselves in this down-draft with pockets of subprime exposure."

Wachovia has an additional $2.1 billion of exposure to more traditional subprime mortgage-backed bonds. The value of those holdings remained steady in October as hedging strategies offset losses.

In a regulatory filing with the SEC, the financial services provider said the market in November so far remains "extraordinarily volatile."

Analysts polled by Thomson Financial, on average, were forecasting earnings of $1.08 per share for Wachovia before the writedown announcement.

Friedman Billings Ramsey analyst Gary B. Townsend predicted Friday that Wachovia's shares "will remain under pressure until real estate markets and nonperforming assets levels stablize."

Last month, Merrill Lynch & Co. took $7.9 billion in subprime mortgage-related writedowns for the third quarter, less than three weeks after saying it losses would only amount to about $4.5 billion. Merrill blamed further October market deterioration for the increased loss.

Mortgage-related writedowns across the banking industry eclipsed $40 billion during the third quarter, and the fourth quarter is already shaping up to be just as bad, if not worse.

Wachovia is the third national financial institution to announce fourth-quarter writedowns eclipsing $1 billion. Citigroup Inc. said it will likely take between $8 billion and $11 billion in writedowns during the fourth quarter, while Morgan Stanley said it will take up to $6 billion in writedowns during its fiscal fourth quarter, which ends Nov. 30.