Monday, April 14, 2008

Wachovia latest wounded by credit woes

Wachovia Corp. said it will raise $7 billion in capital through stock sales and cut its dividend by 41%, a consequence of its ill-timed move into the mortgage industry, as it swung to a first-quarter net loss caused by $2 billion in "market-disruption" losses and sinking credit quality.

The common- and preferred-stock sales are "in response to unprecedented economic conditions," said Chairman and Chief Executive Ken Thompson. He added the company is "extremely pleased with the strong expressions of interest we've already received regarding these issuances, which demonstrate the confidence of investors in our fundamental strengths and long-term outlook."

....The infusion represents Wachovia's second dip into the capital trough this year. In January and early February, Wachovia pocketed a total of $8.3 billion in capital by issuing preferred stock and other securities to investors

The second round is a sign that banks' fortunes have continued to deteriorate over the past month. While some investors feel confident that the worst of the market crisis is in the rearview mirror, many observers believe that this is the beginning of the troubles for regional banks, which are likely to suffer from rising loan defaults, especially if the economy sinks into a deep recession.
WAMU continues with problems, Wachovia is new this time.

Where did these institutions go wrong? Bad decisions. From Wachovia overspending to acquire a large California mortgage institution two years ago to a series of horrendous decisions by Washington Mutual.
• WaMu aggressively stepped up its lending in some of the riskiest loan types: short-term adjustable-rate mortgages, especially so-called "option ARMs"; home-equity loans and lines of credit; and subprime loans. Over the past four years, more than half of all real-estate loans WaMu made were in one of those higher-risk categories.

• WaMu made billions of dollars' worth of loans with only "limited documentation" of the borrowers' income, net worth or credit history. Such loans — often called "liar loans" or "NINJA loans," for "no income, no job or assets" — make up three-quarters of its $58.9 billion option-ARM portfolio.

• Complaints from appraisers and an investigation by New York's attorney general say WaMu leaned on appraisers to inflate property values to support bigger mortgages.

• In August 2004, WaMu loosened its standards for fronting money to third-party mortgage brokers, allowing brokers with heavier debt loads to make more loans.
Citigroup and Merrill Lynch reveal fresh $15bn loss

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