Wachovia Reports Historic Loss
$23.7 Billion Hit Will Not Affect Merger Plans

By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, October 23, 2008

Wachovia posted a $23.7 billion quarterly loss yesterday, the largest ever for a bank, as its portfolio of loans deteriorated and deposits fled. The report laid bare the serious financial straits the company was in before Wells Fargo announced earlier this month that it would buy Wachovia.

On top of $10 billion in losses earlier this year, the quarter wipes out nearly all the profit Wachovia has earned since 2001, when it merged with First Union and became a much bigger, national bank. Wachovia Chief Financial Officer David Zwiener called the events of the past three months "unprecedented, almost unimaginable."

The quarterly report revealed that Wachovia was experiencing a run on deposits in September, as speculation intensified about whether the bank would survive the financial crisis. Customers pulled out 5 percent of their deposits, or $13.4 billion -- a massive amount for a bank.

San Francisco-based Wells Fargo is buying Charlotte-based Wachovia for $14 billion to form a bank that will have 9,300 branches across the country. Wells Fargo executives said yesterday that Wachovia's losses were in line with what they expected and won't affect their plans.

"We believe that it was prudent for Wachovia to put these losses behind them," said Howard Atkins, Wells Fargo's chief financial officer. "We're on track to complete the merger" by the end of the year.

Still, losses continue to mount. Wachovia predicted it would lose $26.1 billion on its mortgage portfolio through 2009 and could face bigger losses on its $219 billion portfolio of commercial real estate and business loans. Wells Fargo has said it expects Wachovia to bring $74 billion in losses with it.

Wachovia was brought low by the mortgage meltdown. It made an untimely $24 billion purchase in 2005 of Golden West Financial, a California lender that financed risky mortgages in some of the areas hardest hit by the housing downturn.

Most of Wachovia's loss -- $18.8 billion -- stemmed from writing down the value of acquisitions it had made over the years. Many analysts think that Wachovia far overpaid for Golden West.

The company lost $2.5 billion on its portfolio of loans and put away $4.8 billion to cover expected future losses.

Last year, Wachovia posted a $1.7 billion profit for the third quarter. Wachovia shares have lost nearly 90 percent of their value in the past year and closed down 6.24 percent, to $5.71 yesterday.

Wachovia's fortunes turned suddenly in September. In the middle of the month, chief executive Robert K. Steel said he thought the company could weather the crisis. But the failure of Lehman Brothers and the government-engineered takeover of Washington Mutual by J.P. Morgan Chase spooked Wachovia investors and customers.

The company's stock was pummeled. Depositors pulled out. In fact, 25 percent of business account deposits were withdrawn.

Wachovia was facing bankruptcy, Steel later testified, until Citigroup moved in to buy it. That deal was cemented by the Federal Deposit Insurance Corp.'s pledge to cover billions in losses Wachovia would bring to Citigroup.

Days later, Wells Fargo made a richer bid that didn't involve government backing, and Wells Fargo accepted.

Citigroup vowed to press on with its purchase of Wachovia, and all three banks braced for a legal battle. But Citigroup relented earlier this month, allowing the Wells Fargo-Wachovia deal to proceed. Still, Citigroup has filed a lawsuit pursuing billions in damages against the two companies.

Wachovia said yesterday that since the Wells Fargo deal was announced, deposits at the bank have stabilized.

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