Wachovia Ousts Top Executive

Banks' Troubles Continue to Mount

NEW YORK, June 2 -- Wachovia disclosed Monday that it had ousted G. Kennedy Thompson as chief executive, making him the latest leader of a financial services company to be forced out during the credit crisis rattling the banking sector in the United States and abroad.

Although stockholders have been urging his removal for weeks in the face of plunging share prices and a sharp cut in the dividend, the timing of Thompson's departure surprised many industry analysts. It came less than a month after the board stripped him of the title of chairman, prompting some analysts to predict that the nation's fourth-largest bank may be facing more losses and a major restructuring.

Underscoring the tumultuous state of the industry, Washington Mutual, the nation's largest savings and loan company, announced its own management shake-up Monday, removing chief executive Kerry Killinger from his other role as chairman. Shareholders had been angry over dividend cuts and poor performance. In Britain, a large mortgage lender, Bradford & Bingley, issued a warning about profits and said it would sell a 23 percent stake to Texas-based private-equity firm TPG.

Adding to investors' fears were moves by Standard & Poor's to downgrade the debt ratings of Morgan Stanley, Merrill Lynch and Lehman Brothers. The credit-rating agency said further write-downs would probably continue to depress earnings. Standard & Poor's also revised the outlooks for J.P. Morgan Chase and Bank of America to "negative" from "stable."

This storm of unnerving announcements sent financial shares tumbling. The Dow Jones industrial average of 30 blue-chip stocks, which includes J.P. Morgan and Bank of America, plunged 134.50, or 1.1 percent, to 12,503.82. The S&P 500-stock index, a broader market measure, fell 14.71, or 1.1 percent, to 1385.67. The tech-heavy Nasdaq composite index declined 31.13, or 1.2 percent, to 2491.53.

Thompson's retirement from Charlotte-based Wachovia came at the board's request. An interim management team -- with Chairman Lanty Smith temporarily filling in as chief executive -- was put in place after a board meeting Sunday. Smith is to head a committee to find a permanent replacement for Thompson.

"This is a sign that Wachovia hasn't stabilized. Otherwise, they wouldn't have needed to take further action," said Sebastian Hindman, an analyst with SNL Financial. "The fact that they decided to essentially terminate him is a sign that there's more bad news to come. There's going to be more write-downs. . . . Second-quarter earnings are going to be interesting."

But Smith stressed that the decision to replace Thompson was based on "a series of previously disclosed disappointments and setbacks which just cumulatively have negatively impacted the company and its overall performance."

"The timing is such that we believe this is the right thing to reenergize Wachovia right now," Smith said in a conference call with reporters Monday morning. "There's no single precipitating event. There's no new problem to announce."

He said that he did not anticipate major changes at the bank and that the board was "very comfortable" with Wachovia's business structure. "We don't have a crisis," he said.

The company's stock has been under pressure since its May 2006 acquisition of Golden West Financial, a California mortgage lender that specialized in interest-only mortgages. It was an aggressive bet that came as the housing bubble was beginning to deflate, and it ultimately damaged Thompson's credibility. Weakness in that business hurt first-quarter earnings at Wachovia, which reported a $350 million loss compared with a profit of $2.3 billion in the corresponding period a year earlier. The bank has been forced to cut its dividend 41 percent and raise billions of dollars by issuing various securities to shore up its balance sheet.

Smith said Monday that he did not think the bank would have to raise additional capital. But some analysts said this may be necessary depending on the severity of the economic downturn, which has led U.S. banks to take losses not only on securities linked to residential mortgages but also on a widening array of debt, including auto loans, credit cards, construction loans and commercial mortgages.

"Across the board, we anticipate credit problems for the banking industry are going to worsen this year as we move further down the leg of the credit cycle," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "Unfortunately for Wachovia, they seem to be caught up the most in all the areas. . . . The company is exposed to all the problems there is, which has obviously affected their stock price and now has cost Ken Thompson his job."

Thomson, 58, joined Wachovia in 1976 and had been at its helm for the past eight years. He will receive a severance package worth $8.7 million, according to Equilar, an executive-compensation research firm. The amount includes $7.2 million of all unvested restricted stock and 16 months of salary, or $1.5 million. He will also be reimbursed for up to $50,000 of legal expenses incurred while negotiating his retirement agreement, as well as office space and an executive assistant for three years at the company's headquarters.

Thompson and Killinger are the latest executives to lose their management positions as financial firms report mounting losses from risky mortgages and other loans that have soured. Citigroup's Charles Prince and Merrill Lynch's E. Stanley O'Neal have resigned since the credit turmoil began to hammer bank earnings last year.