Wachovia in Talks On Its Possible Sale

By Binyamin Appelbaum and Neil Irwin
Washington Post Staff Writers
Monday, September 29, 2008

Wachovia, saddled by mortgage losses, is in talks about a possible sale to a healthier bank such as Citigroup and Wells Fargo, according to sources familiar with the discussions.

Senior executives of the three companies held extensive discussions over the weekend in a process closely watched and encouraged by federal regulators. The Treasury Department, the Federal Deposit Insurance Corp. and several branches of the Federal Reserve were involved in the conversations.

Wachovia, based in Charlotte, operates the nation's third-largest commercial bank and the second-largest retail brokerage. It is the largest bank in the Washington area.

A deal with either Citigroup or Wells Fargo would give the purchaser a retail banking franchise with the same breadth as Bank of America and J.P. Morgan Chase.

Wachovia's success in recent years was widely admired by its rivals, and its financial health was considered superb. Now its survival as an independent company is threatened by losses on mortgage loans, suggesting how virulent the plague sweeping the financial system has become.

The company bought its troubles in 2006 with the $25 billion acquisition of Golden West Financial, a major mortgage lender based in California. Golden West specialized in "option" mortgage loans, which allow customers to pay less than the maximum each month, as on a credit card.

High rates of borrower defaults have already crushed several of the largest option mortgage companies, including IndyMac Bancorp and Washington Mutual, which failed last week and was immediately bought by J.P. Morgan.

J.P. Morgan estimated that Washington Mutual had a loss rate of 20 percent on its mortgage portfolio. Wachovia so far has acknowledged a loss rate of only 12 percent on its portfolio, leading many investors to conclude that the worst is yet to come.

The company has said repeatedly that its financial condition remains strong.

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