Category: business

Wachovia takes $1.3 billion hit to its ego

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.

American corporate profits heading lower

Most US strategists predict corporate profits slowing yet still showing year over year gains of approximately 7%. But according to the latest from The Economist magazine the devil is in the details.

Optimists cite the relatively modest ratio of share prices to forecast profits as a reason for buying equities. That assumes the strength of profits will last. But, according to Chris Watling of Longview Economics, a consultancy, profits now comprise the highest share of American output since the 1960s. If profits revert to the mean, a pillar of the stock market will be removed.

Gerard Minack, a Morgan Stanley strategist, says American earnings per share are now 75% above the long-term trend, the biggest divergence recorded in the past 90 years. Most explanations for the recent strength of corporate profits have centred on the effects of globalisation; in particular, the impact of Asian workers on labour costs. But there is another possibility; the influence of the financial sector. According to Mr Watling, the sector now contributes around 27% of the profits made by companies in the S&P 500 index, up from 19% in 1996. He reckons financial companies are responsible for a third of all of the growth in American quoted-company profits over the past decade.

My comments: Inverted yield curve, contraction in credit and overall collateral declines will continue to negatively impact the Wall Street EPS machine. Houston we have a problem.

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