Wachovia’s Woes Worsen

One of three banks targeted by New York's AG, the Charlotte company also reports widening layoffs, a boost in legal loss reserves, and ARS-related ...
Stephen Taub and Roy HarrisAugust 12, 2008

What next for Wachovia?

While the Charlotte-based banking giant was one of three (along with Morgan Stanley and JP Morgan Chase) being pressured by the New York attorney general to reimburse clients for action rate securities losses, Wachovia has a lot more trouble at its teller’s window. It is raising the prospect of administrative proceedings against it by the Securities and Exchange Commission; confirming talks in probes by various state regulators that it didn’t name; sharply widening its already deep layoff plan, and boosting legal reserves by $500 million for the second quarter.

In recent weeks both CFO Thomas Wurtz and chief risk officer Donald Truslow also have announced plans to leave the company once successors are named.

In its 10-K filing with the SEC, Wachovia said that regulator’s could undertake civil or administrative proceedings against its Wachovia Bank N.A., or both types of actions, in connection with the bidding of various financial instruments associated with municipal securities. The company also said it is in active discussion with the SEC concerning investigations related to the underwriting, sale, and subsequent auctions of certain auction rate securities by Wachovia Securities LLC and Wachovia Capital Markets LLC.

On the state level, Wachovia said it had received subpoenas from various attorneys general regarding similar matters. It added that it is cooperating with the state and federal investigations, and is in active discussions about potential settlement on both levels.

While the bank didn’t mention specific states, a Charlotte Business Journal article noted that Wachovia Securities has been in discussions with Missouri Secretary of State Robin Carnahan about an agreement that could address auction rate securities held by Wachovia customers. The Missouri secretary of state’s securities division conducted a special inspection of Wachovia’s St. Louis headquarters last month, the paper noted.

In its filing, Wachovia said the increase in legal reserves includes amounts set aside for estimated market valuation losses on auction rate securities associated with one potential settlement. “We do not currently expect that the possible settlement would have a material effect on capital, liquidity, or overall financial results through estimated maturities or redemptions for affected auction rate securities, or alter Wachovia’s previously announced focus on improving our tier 1 capital ratio,” the company said in its filing. It added that it expects that capital ratio will decrease by about three basis points following a potential settlement.

The SEC filing also listed a number of civil suits in which it is a defendant.

This week’s layoff news — the cutting of 600 more jobs — was particularly startling because the bank now has targeted 11,350 positions for elimination, including 6,950 active employees and 4,400 open positions, according to published reports. All of the additional job cuts will be in the bank’s mortgage business, the Associated Press reported.

The earlier layoffs and elimination of open positions were announced on July 22 — the day Wachovia also posted a second-quarter loss of $8.9 billion and slashed its dividend and announcing that it would exit the wholesale mortgage market. Its turnaround plan, it said then, was designed to produce $1.5 billion in cost savings by 2009.