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Posted: Wednesday, Sep. 10, 2008

Steel lays out strategies

By Christina Rexrode
Published in: Banking
  • Just for taking the job, Wachovia Corp.'s new chief financial officer gets an upfront bonus of $4 million, 1million stock options and 800,000 shares of restricted stock, the Charlotte bank said in a filing Tuesday.

    The payments are to compensate David Zwiener for partnership equity, a 2008 bonus and other benefits he forfeits by leaving the Carlyle Group private-equity firm. Zwiener, whose appointment was announced Monday, will replace the retiring Tom Wurtz no later than Oct. 1.

    The $4 million payment covers “one-time transition expenses” and his expected Carlyle bonus, according to the filing. The 1 million options vest in three equal installments and are good for 10 years. The restricted shares vest based on the performance of Wachovia's stock. In the next six years, it must trade at $35 over a 15-day period for the award to fully vest. Wachovia shares closed Tuesday at $16.24.

    Under a three-year agreement that automatically renews, the new CFO each year will get a salary of $500,000, a target bonus of $3.75 million and a target stock grant of $3.75 million.

    Rick Rothacker

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    Wachovia Corp. chief executive Bob Steel outlined Tuesday how he's separating the toxic Pick-A-Payment mortgage portfolio from the rest of the bank.

    Steel is assembling a SWAT team of senior bank leaders to approach the Pick-A-Pay portfolio as if they were investors trying to squeeze value out of a distressed asset, he said. He has christened them the DART, for Distressed Asset Resolution Team.

    Speaking at a financial services conference in New York, Steel also noted that the bank had sold all its preferred shares of Fannie Mae and Freddie Mac in July at a loss of $171 million. He also said that almost all the workers – 87 percent – affected by this summer's job cuts have been notified.

    “We believe we've accomplished a great deal in a short amount of time,” said Steel, 57, whom the bank recruited two months ago after ousting CEO Ken Thompson. “I'm very confident that we're moving in the right direction and making the tough decisions.”

    But, he added later, “To tell you that I had it all buttoned up and raised my right hand … would be disingenuous. But we're on the case.”

    Steel's comments on credit costs and the loss on Fannie and Freddie shares prompted Deutsche Bank to estimate Wachovia will lose 10 cents per share in the third quarter, compared with a previous estimate of an 11-cent profit. “The company is moving ahead on its expense program and will review all options, including modest asset sales,” analyst Mike Mayo said in a note to investors.

    Wachovia's shares had soared Monday on news of Fannie and Freddie's takeover, climbing 13 percent to $18.99. Tuesday, the market wiped out those gains, and Wachovia shares fell 14.5 percent to $16.24.

    Steel reiterated familiar themes at Tuesday's conference, noting Wachovia's strengths in retail banking and customer service. Revenues in the general bank, wealth management, and corporate and investment banking are up.

    Golden West: Steel detailed plans to essentially spin off the troubled, $122 billion portfolio of Pick-A-Pay mortgages, inherited from the purchase of Golden West Financial Corp. Spokeswoman Christy Phillips-Brown said the size of the DART team has yet to be determined. Team members will likely come from both inside and outside the bank, she said.

    Steel also confirmed that Wachovia is talking to outside organizations that might take over certain functions in dealing with the Pick-A-Pay loans. The Observer reported last week that the bank was reportedly enlisting outside brokers to help contact customers about refinancing options.

    More than 900 mortgage workers will be reassigned to help Pick-A-Pay customers refinance and restructure their loans. Those operations should be running by next month. They will be based in Charlotte; Jacksonville, Fla.; and San Leandro, Calif. Wachovia still expects a 12 percent cumulative loss on the Golden West portfolio, Steel said, though he pointed out that Wachovia has some advantages over competitors who are also dealing with mortgage defaults. Wachovia holds the Pick-A-Pay loans on its own portfolio and services them in-house. “We know these borrowers,” Steel said, “and how to find them and reach them directly.”

    Fannie and Freddie: Steel said that Wachovia sold $509 million worth of Fannie and Freddie preferred shares in July, at a loss of $171 million, which eliminated its exposure to Fannie and Freddie shares. Other banks are expected to detail their exposure to shares of the two mortgage giants when third-quarter reports are released.

    Costs: Wachovia plans to save more than $6 billion by the end of next year, and it has already slashed its quarterly dividend payout, cut jobs and trimmed the balance sheet. It is considering selling certain “noncore” assets, and rumors have circulated that the insurance business could be on the chopping block. Steel said the bank was considering assets “that are good at the margin but not game changers.” He said the sales would be in the order of “several hundreds of millions of dollars, not billions of dollars.”

    This summer, the bank announced it would cut about 6,950 employees, as well as eliminate 4,400 open positions and contractors. Tuesday, Steel said that about 87 percent of affected employees have been notified. However, the bank does not expect to realize any cost savings until next year, because of expenses related to severance and other costs.

    Rick Rothacker contributed to this report.

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