Banking & Capital Markets

Wachovia Walloped by $6.1B Goodwill Hit

Stunning Q2 loss of $8.9 billion leads it to add $5.6 billion to loan loss reserves, slash dividend, and ax 6,350 employees.
Stephen TaubJuly 22, 2008

Wachovia Corp. reported an $8.9 billion second-quarter loss, including a $6.1 billion noncash goodwill impairment charge in what it called commercial-related subsegments. The giant deficit stunned observers who had hoped for a gentler slope to big bank’s earnings slide.

The bank said the goodwill writeoffs reflect declining market valuations and asset values. It stressed the goodwill impairment charge has no impact on Wachovia’s tangible capital levels, regulatory capital ratios, or liquidity.

The embattled bank also said that it had added $5.6 billion to its loan loss reserve to cover net charge-offs and increase the reserve by $4.2 billion.

In an effort to preserve cash, it also slashed the dividend quarterly dividend to five cents a share from 37.5 cents, noting that the move will conserve about $700 million of capital per quarter. In April, Wachovia pared its dividend 41 percent.

In addition, the bank will reduce employment by 6,350, according to the Associated Press, which also said Wachovia will eliminate 4,400 open positions and contractors.

“These bottom-line results are disappointing and unacceptable,” said Wachovia chairman Lanty L. Smith. “While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility.”

Much of Wachovia’s problem stems from its 2006 acquisition of Golden West Financial Corp. for about $25 billion at the top of the real estate boom before it came crashing down. Golden West was known for underwriting some of the most “creative” mortgage loans, including the so-called “Pick-A-Payment” loan option. Under this program, which Wachovia recently halted, borrows can choose to make a partial interest payment on all new home loans.

“The entire organization is focused on protecting, preserving and generating capital; reinforcing Wachovia’s strong liquidity position; and reducing risk,” said Robert K. Steel, who two weeks ago was hired as CEO and president after serving as undersecretary for domestic finance at the U.S. Department of Treasury.