Capital Markets

Wachovia’s Waves Pound Prudential

Damage to 2003 joint venture leads Pru to take a $125m charge in the wake of the Charlotte bank's big increase in reserves.
Stephen TaubAugust 13, 2008

Wachovia’s woes are buffeting Prudential Financial Inc., which has a joint venture with the Charlotte-based bank.

In a regulatory filing, Prudential warned that it will take a $125 million pre-tax charge to reflect Wachovia’s decision to increase its reserves by $500 million in the second quarter, due to Wachovia’s legal problems.

Earlier this week, Wachovia reported in a filing that it is in active discussions of potential settlement with various state regulators and the SEC of ongoing investigations concerning the underwriting, sale and subsequent auctions of certain auction rate securities by subsidiaries of Wachovia Securities. Wachovia reported that the legal expense includes amounts reserved for estimated market valuation losses on auction rate securities associated with a potential settlement.

Problems at Wachovia affect Prudential because of a 2003 arrangement in which Prudential combined its retail securities brokerage and clearing operations with those of Wachovia, forming the Wachovia Securities Financial Holdings LLC joint venture. As of last Dec. 31, Prudential had a 38 percent ownership interest in the joint venture with Wachovia owning the remaining 62 percent.

Last October, Wachovia completed the acquisition of A.G. Edwards Inc. for $6.8 billion, and on Jan. 1 combined the retail securities brokerage business of A.G. Edwards with Wachovia Securities.

Prudential noted that it has elected the “lookback” option under the terms of the joint venture. The lookback option permits Prudential to delay for two years following the combination of the A.G. Edwards business with Wachovia its decision to make or not to make payments to avoid or limit dilution of its ownership interest in the joint venture.

During this lookback period, Prudential’s share in the earnings of the joint venture and one-time costs associated with the combination of the A.G. Edwards business with Wachovia Securities is based on its diluted ownership level, which Prudential said is in the process of being determined.