As the WSJ reported yesterday, Wachovia took a $1.3 billion hit to its bond portfolio during the 3rd quarter:
“We had an institutional bias against subprime,” G. Kennedy Thompson, Wachovia’s chairman and chief executive, told analysts in a conference call. But subprime-backed bonds held by the fifth-largest U.S. bank lost as much as half their value when credit markets suddenly froze, even though the vast majority of the bonds were AAA-rated, according to Wachovia. “We didn’t expect paper could degenerate that fast,” Mr. Thompson said.
The $347 million in resulting losses from those securities was just part of an overall $1.3 billion decline in the value of various investments held by Wachovia’s corporate- and investment-banking unit. The unit’s profit tumbled 80% to $105 million from $533 million a year earlier.
Contributing to the losses was the ill-timed acquisition of Golden West Financial in May, 2006:
The Charlotte, N.C., bank also reported a large boost in the size of its loan-loss provision, as it girds itself for more trouble from the weak housing market. Of particular concern to some analysts and investors are mortgages that Wachovia inherited from Golden West Financial Corp., a thrift acquired for $24 billion last year. Golden West’s loans were concentrated in California, where home prices are slumping, and the thrift specialized in option adjustable-rate mortgages, which let customers choose how much to pay each month.
As it turns out, the housing bubble had peaked roughly nine months earlier, yet Thompson was optimistic about Golden West, a mortgage lender operating right at its epicenter:
“We feel like we are merging with a crown jewel. This is a transformative deal for us.”
On June 28th of this year, Thompson spoke with CNBC‘s Maria Bartiromo about his stewardship of Wachovia:
“I’d say look at our track record. We’ve done four large mergers since I’ve been CEO and they’ve all been successful.”
My comment: The credit bubble floated many egos and dicey business plans. We are about to find out who is swimming without a bathing suit as the tide goes out.