Business

Wachovia may plan to unload troubled loans

Wachovia Corp.'s hiring of Goldman Sachs Group Inc. to analyze its loan portfolio could mean the Charlotte bank is looking to sell off troubled mortgages that have been at the root of its recent problems, analysts said Tuesday.

By shedding these mortgages Wachovia could face a loss now but eliminate future risk, analysts said. The loans could be sold in bulk or packaged into securities, although that market has largely dried up in the mortgage meltdown.

The bank has been besieged by mortgage losses in its $120 billion Pick-A-Payment mortgage portfolio, which was acquired in 2006 from Golden West Financial Corp. These loans allow borrowers to make a minimum payment that doesn't cover all of the interest and are concentrated in troubled California mortgage markets.

“I think they are looking at the mortgage business and seeing how they can get some of these ‘Pick-to-not-Pay' mortgages off their balance sheet,” said Nancy Bush, analyst with NAB Research in New Jersey.

Wachovia on Monday told the Observer that it had hired Goldman Sachs to perform “analytics on our loan portfolio to evaluate various alternatives.” The bank declined further comment.

The hiring comes amid the bank's ongoing review of its mortgage strategy. Current and former employees in Wachovia's mortgage unit say loan officers increasingly face the loss of their jobs for not meeting ambitious sales goals. They're also bracing for the possibility of layoffs.

Wachovia spokesman Don Vecchiarello said the company is still in the middle of doing a “strategic overview” and hasn't announced any plans publicly or internally. “Like other businesses in this environment, we are constantly making sure we are appropriately staffed,” he said.

The troubled $24 billion Golden West acquisition and other miscues led this month to the ouster of chief executive Ken Thompson. Chairman and interim CEO Lanty Smith is leading a search for a permanent successor.

In recent months, banks have set aside billions to cover loan losses as borrowers struggle to make their payments. But Wachovia could seek to get rid of these loans altogether by selling them to other investors. Whether there will be many buyers for these loans, however, is unclear.

In a research note Tuesday, analyst Dick Bove of Ladenburg Thalmann & Co. said the Goldman hiring implies the bank will mark down a “sizable package of loans” so they can be sold more easily. “This could be a meaningful charge to second-quarter earnings,” he said.

Golden West kept its mortgages in its own portfolio instead of selling them to investors. Those loans fared well in previous downturns but have soured faster than traditional mortgage in recent quarters.

In the first quarter, Wachovia set aside $1.3 billion to cover losses in Pick-A-Payment loans, a big part of its $2.8 billion provision for bad loans. For the period, the bank reported an overall loss of $707 million, or 36 cents per share. It discloses second-quarter earnings next month.

Bove said bringing in Goldman for this work sends a troubling signal about the bank's own ability to analyze bad loans. Goldman assisted Wachovia earlier this year, helping it raise about $8 billion in capital through common and preferred stock offerings. Many banks have been raising capital in recent months to absorb mounting loan losses.

With the mortgage unit under pressure, Wachovia loan officers say they are increasingly worried about their jobs. Some employees are being asked to resign, while others say they have been fired for what managers have called performance reasons. The current and former employees, who asked for anonymity to protect their careers, said they suspect the bank wants to save on severance costs by eliminating employees now.

On the West Coast, loan officers are worried they will be laid off soon because their business is waning due to tighter lending guidelines, said a source familiar with the situation. “They are effectively out of work,” the source said.

A buyer in the wings?

The hiring of Goldman has added to speculation about whether Wachovia could be bought by another bank. Goldman has expertise in providing merger-and-acquisition advice but a source told the Observer that the firm is not providing this kind of assistance. Smith, the interim CEO, has said Wachovia's board believes it's best to stay an independent company.

The potential buyer getting the most buzz is JPMorgan Chase & Co., which has expressed a desire to expand in the Southeast. The New York bank, though, is busy with its purchase of investment bank Bear Stearns and such a combination would eclipse a cap that prevents banks from exceeding 10 percent of U.S. deposits through an acquisition.

Foreign banks such as the Royal Bank of Canada are another possibility. But Bove, in his note, said the “U.S. government is not likely to look favorably on a foreign buyer acquiring the nation's fourth-largest bank” by assets.

Investment banks also might want to pair up with an institution with more than $440 billion in deposits, a stable source of funding for their operations. But these firms also face their own issues, including write downs from mortgage-related securities.

Gary Townsend, a longtime analyst who co-founded Maryland-based investment firm Hill-Townsend Capital, puts the chance of a Wachovia sale at less than 50 percent. “There are not too many likely candidates,” he said, “because almost everyone has their own problems.”

On a positive day for financial stocks, Wachovia shares climbed more than 5 percent to $17.86, a bigger jump than most of the bank's peers.

Wachovia Corp.'s hiring of Goldman Sachs Group Inc. to analyze its loan portfolio could mean the Charlotte bank is looking to sell off troubled mortgages that have been at the root of its recent problems, analysts said Tuesday.

By shedding these mortgages Wachovia could face a loss now but eliminate future risk, analysts said. The loans could be sold in bulk or packaged into securities, although that market has largely dried up in the mortgage meltdown.

The bank has been besieged by mortgage losses in its $120 billion Pick-A-Payment mortgage portfolio, which was acquired in 2006 from Golden West Financial Corp. These loans allow borrowers to make a minimum payment that doesn't cover all of the interest and are concentrated in troubled California mortgage markets.

“I think they are looking at the mortgage business and seeing how they can get some of these ‘Pick-to-not-Pay' mortgages off their balance sheet,” said Nancy Bush, analyst with NAB Research in New Jersey.

Wachovia on Monday told the Observer that it had hired Goldman Sachs to perform “analytics on our loan portfolio to evaluate various alternatives.” The bank declined further comment.

The hiring comes amid the bank's ongoing review of its mortgage strategy. Current and former employees in Wachovia's mortgage unit say loan officers increasingly face the loss of their jobs for not meeting ambitious sales goals. They're also bracing for the possibility of layoffs.

Wachovia spokesman Don Vecchiarello said the company is still in the middle of doing a “strategic overview” and hasn't announced any plans publicly or internally. “Like other businesses in this environment, we are constantly making sure we are appropriately staffed,” he said.

The troubled $24 billion Golden West acquisition and other miscues led this month to the ouster of chief executive Ken Thompson. Chairman and interim CEO Lanty Smith is leading a search for a permanent successor.

In recent months, banks have set aside billions to cover loan losses as borrowers struggle to make their payments. But Wachovia could seek to get rid of these loans altogether by selling them to other investors. Whether there will be many buyers for these loans, however, is unclear.

In a research note Tuesday, analyst Dick Bove of Ladenburg Thalmann & Co. said the Goldman hiring implies the bank will mark down a “sizable package of loans” so they can be sold more easily. “This could be a meaningful charge to second-quarter earnings,” he said.

Golden West kept its mortgages in its own portfolio instead of selling them to investors. Those loans fared well in previous downturns but have soured faster than traditional mortgage in recent quarters.

In the first quarter, Wachovia set aside $1.3 billion to cover losses in Pick-A-Payment loans, a big part of its $2.8 billion provision for bad loans. For the period, the bank reported an overall loss of $707 million, or 36 cents per share. It discloses second-quarter earnings next month.

Bove said bringing in Goldman for this work sends a troubling signal about the bank's own ability to analyze bad loans. Goldman assisted Wachovia earlier this year, helping it raise about $8 billion in capital through common and preferred stock offerings. Many banks have been raising capital in recent months to absorb mounting loan losses.

With the mortgage unit under pressure, Wachovia loan officers say they are increasingly worried about their jobs. Some employees are being asked to resign, while others say they have been fired for what managers have called performance reasons. The current and former employees, who asked for anonymity to protect their careers, said they suspect the bank wants to save on severance costs by eliminating employees now.

On the West Coast, loan officers are worried they will be laid off soon because their business is waning due to tighter lending guidelines, said a source familiar with the situation. “They are effectively out of work,” the source said.

A buyer in the wings?

The hiring of Goldman has added to speculation about whether Wachovia could be bought by another bank. Goldman has expertise in providing merger-and-acquisition advice but a source told the Observer that the firm is not providing this kind of assistance. Smith, the interim CEO, has said Wachovia's board believes it's best to stay an independent company.

The potential buyer getting the most buzz is JPMorgan Chase & Co., which has expressed a desire to expand in the Southeast. The New York bank, though, is busy with its purchase of investment bank Bear Stearns and such a combination would eclipse a cap that prevents banks from exceeding 10 percent of U.S. deposits through an acquisition.

Foreign banks such as the Royal Bank of Canada are another possibility. But Bove, in his note, said the “U.S. government is not likely to look favorably on a foreign buyer acquiring the nation's fourth-largest bank” by assets.

Investment banks also might want to pair up with an institution with more than $440 billion in deposits, a stable source of funding for their operations. But these firms also face their own issues, including write downs from mortgage-related securities.

Gary Townsend, a longtime analyst who co-founded Maryland-based investment firm Hill-Townsend Capital, puts the chance of a Wachovia sale at less than 50 percent. “There are not too many likely candidates,” he said, “because almost everyone has their own problems.”

On a positive day for financial stocks, Wachovia shares climbed more than 5 percent to $17.86, a bigger jump than most of the bank's peers.

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