Wells Fargo plays down $24bn loss at Wachovia

• Loss more than price to be paid for the lender by rival
• Value of takeover deal falls as share price takes a hit

* Jill Treanor and Chris Tryhorn
* The Guardian,
* Thursday October 23 2008
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* Article history

The stricken US bank Wachovia reported yesterday the biggest quarterly loss of any bank since the onset of the credit crunch.

The $24bn (£14.7bn) of losses amount to more than the total price being paid for the North Carolina lender by its rival Wells Fargo, which was last night playing down the impact of the figures on the combined business.

The losses for the three months to the end of September - which compare with earnings of $1.62bn in the same quarter last year - were caused by an $18.8bn write-down on the value of loans and securities and a further $4.8bn to cover losses expected in the future.

The loss is even greater than the $12bn reported by the Swiss bank UBS in the first quarter, one of the biggest losses recorded since the US sub-prime mortgage crisis started to reverberate around financial markets a year ago.

Robert Steel, Wachovia's president and chief executive, said: "Although this has been a challenging quarter, Wachovia's underlying businesses remain solid and our franchise exceptionally attractive. We look forward to the opportunities that lie ahead as we join forces with Wells Fargo." He added: "The market environment changed more precipitously than anyone had expected."

Steel was forced to seek a saviour for Wachovia earlier this month, just weeks after insisting the bank was strong enough to remain independent.

The losses at Wachovia helped knock sentiment in the wider stockmarket yesterday, which was unnerved by concerns over the US economy. The Dow Jones industrial average was off as much as 400 points by mid-afternoon in New York. Shares in Wells Fargo were knocked following the news from Wachovia.

Wachovia was running into trouble even before the collapse of investment bank Lehman Brothers last month. Many of its woes stem from its decision to buy the Californian mortgage lender Golden West Financial two years ago at the height of the housing boom and now causing the write-downs that have driven it deep into the red. Wachovia has written off $6.6bn in credit losses arising from the acquisition of Golden West Financial - and the housing woes are far from over. It has also forecast $26.1bn in mortgage-related losses next year.

Giving an insight into the US housing market, Wachovia said that in an area of California south-east of San Francisco, borrowers owe an average of 66% more on their loans than their homes are worth.

After the collapse of Lehman Brothers caused mayhem in the financial markets, the US government stepped in to help Wachovia by agreeing to limit its losses to allow a rescue takeover of its retail banking operations by Citigroup.

But just four days later Wells Fargo jumped in with a bid for the whole bank, winning the support of the Wachovia board. After threatening legal action at having its plans thwarted, Citigroup decided to walk away.

John Stumpf, president and chief executive of Wells Fargo, stood by the deal yesterday despite the grim figures. "Wachovia's third-quarter results were very much in line with our expectations," he said. "We're more encouraged than ever by what we've seen in their franchise and we're pleased that Wachovia's team continues to focus on serving customers," he added.

Wells Fargo, which structured the deal without the need for the guarantees offered to Citigroup, initially agreed to pay $15bn for Wachovia. But the offer is decreasing in value in line with the fall in the Wells Fargo share price and is now worth closer to $14bn.

Wells Fargo is planning to raise $20bn of new capital once the deal is completed and insisted yesterday that these plans would not be affected by Wachovia's woes.

But the precarious conditions in the financial markets and the weakening condition of Wachovia has encouraged the Fed to hasten the approval of the deal.

Profits in Wachovia's retail banking division fell 48% to $857m, while its corporate and investment bank lost $703m, compared with a $212m profit in the same quarter last year. The capital-management arm lost $499m.

* guardian.co.uk © Guardian News and Media Limited 2008