Business

Wachovia CEO targets problems

On his first full day as Wachovia Corp.'s new leader, Bob Steel acknowledged problems at the troubled bank and pledged to face them head on.

He laid out a mission to remake the Charlotte bank into the industry leader it used to be – subtly deflecting speculation that he was brought in only to patch up the company so it can be sold.

“We're going to make Wachovia great, and that's the plan,” Steel said. “We're going to … get the whole organization back on the front foot, moving forward like it was really doing just a year ago.”

The bank will have to cut costs as it braces for an estimated loss of some $2.8 billion for the second quarter, Steel acknowledged. Some analysts predict a smaller Wachovia, expecting layoffs, branch closings and another cut to the shareholder dividend.

Steel, 56, promised no quick fixes. “I come to this with a great deal of excitement,” he said, “but admittedly a bit of trepidation.”

His is a key assignment for Charlotte, where the bank employs about 21,000 and has long been a major civic player.

The Durham native and Duke University graduate acknowledged tough times for the industry, and Wachovia in particular. He praised the determination of employees and the company's core businesses that can preserve a “strong and independent” company. He said current management had already taken key steps to fix the bank's problems, but acknowledged more bumps lie ahead.

He and Lanty Smith, who served as interim chief executive and continues as board chairman, spoke in vague terms about building on Wachovia's strength in retail banking and fixing problem assets, with an emphasis on mortgage loans.

They said they'd reveal more details when second-quarter earnings are released July 22.

Steel's installation, meant as a sign of stability, didn't quiet the concerns of analysts, who continued to wonder if the bank would be bought out. On Thursday, shares fell 8 percent to $13.13 – compared to $50.56 a year ago.

Steel spoke from prepared remarks but with a hint of self-deprecating humor. Hundreds of employees gathered for his introduction in the bank's uptown atrium, spilling out the doors.

Though Steel and Smith projected an air of camaraderie, Steel has been hired to clean up a mess for which Smith is partly responsible.

Some analysts wondered if there would be big shakeups in senior management or the board of directors, who have been criticized for being complacent during the ill-fated purchase of Golden West Financial Corp. in 2006. Smith said it would be inappropriate to discuss possible changes to the board on Thursday, since directors have been focused on finding a new CEO.

The appointment of Steel, who served with Smith on Duke University's board of trustees, indicates that Smith will have a high-profile position in the new Wachovia order, said Dick Bove, an analyst at Ladenburg Thalmann.

“Somehow,” Bove wrote, “(Steel) must wrest control of the company from the men who brought the company to its knees.”

Golden West

Smith set the tone for a clean slate on mortgages by acknowledging that the bank blundered when it bought Golden West two years ago. Bank leaders gambled then that Golden West's exotic mortgages would continue to hold up, but they didn't predict the severity of the housing downturn.

“There's been a complete recognition at the board level that Golden West was a mistake and that we have to deal with the consequences of it,” Smith said.

The bank's $24 billion purchase of Golden West at the height of the mortgage bubble tarnished the Wachovia brand name, triggered rising mortgage defaults, and led to longtime CEO Ken Thompson's dismissal June 1.

When Steel was asked if he would divest any of Golden West's assets or operations, he reiterated his plans to identify and fix the bank's problem assets.

The bank expects $500 million in second-quarter charge-offs, or loans it doesn't expect to collect on, from the Pick-A-Payment mortgages it inherited from Golden West. That accounts for almost 40 percent of the bank's total expected charge-offs for the second quarter; another 21 percent is expected to come from commercial real estate.

Cost cutting

Like many financial institutions, Wachovia has announced layoffs this year, including 500 corporate and investment banking positions in April and 50 technology positions last week. Smith said the bank would pursue an “aggressive cost reduction program” and promised more details on July 22. He hinted at a smaller future bank, saying Wachovia would “selectively and cautiously” shrink its balance sheet, particularly its mortgage portfolio.

Steel said he'd be as straightforward with employees as possible. “Some businesses are growing,” he said. “… Some are contracting.”

For shareholders, Smith wouldn't specify whether the bank would need to raise more capital. Wachovia already cut its shareholder dividend by 41 percent this year. In April, it went to the markets to raise $8billion – which can also hurt shareholders by diluting the value of their holdings.

"We're going to look at all the actions available to this company, and it is a long list,” Smith said.

Steel's appointment doesn't mean the bank suddenly won't need to cut its dividend or raise more capital, analysts said. In fact, since the new chief has a license to right the bank, Wachovia could take a “significant charge to ‘clean up' its problems once and for all,” said Gerard Cassidy, an analyst at RBC Capital Markets.

Takeover

Analysts also continued to buzz about the possibility that Wachovia could be bought out. Though Smith has indicated the bank's intent to stay independent, its share price – at levels not seen since the early '90s – makes it an attractive takeover target.

Though hiring a new CEO presumably reinforces that intent to stay independent, analyst Kevin Fitzsimmons of Sandler O'Neill + Partners wondered if Steel would be seen as the man to get the bank in order so that it can be sold for a better price.

Steel's connection to Goldman Sachs – he spent 30 years there before joining the Treasury in 2006 – has further sparked takeover rumors.

Last month, Wachovia confirmed that it had hired Goldman to analyze its loan portfolio. But Steel noted that the Wachovia-Goldman connection was forged before he came to Wachovia, and Smith denied the Goldman takeover rumors.

“It's a one-shot relationship kind of assignment,” Smith said. “It's not a prelude to anything else.”

Other divisions

Steel said Wachovia will build on strengths including its retail bank, which is known for stellar customer relations and accounts for 70 percent of Wachovia's earnings. “There are other organizations that would kill to have Wachovia's core strengths,” Steel said.

Smith indicated that the bank, like many peers, could continue to trim its investment operations, which are Wall Street-style services such as stock and bond offerings. “You will not see Wachovia in the future doing a lot of esoteric structured products,” Smith said. It's important, he added, to “not let your aspirations outrun your capabilities.”

On his first full day as Wachovia Corp.'s new leader, Bob Steel acknowledged problems at the troubled bank and pledged to face them head on.

He laid out a mission to remake the Charlotte bank into the industry leader it used to be – subtly deflecting speculation that he was brought in only to patch up the company so it can be sold.

“We're going to make Wachovia great, and that's the plan,” Steel said. “We're going to … get the whole organization back on the front foot, moving forward like it was really doing just a year ago.”

The bank will have to cut costs as it braces for an estimated loss of some $2.8 billion for the second quarter, Steel acknowledged. Some analysts predict a smaller Wachovia, expecting layoffs, branch closings and another cut to the shareholder dividend.

Steel, 56, promised no quick fixes. “I come to this with a great deal of excitement,” he said, “but admittedly a bit of trepidation.”

His is a key assignment for Charlotte, where the bank employs about 21,000 and has long been a major civic player.

The Durham native and Duke University graduate acknowledged tough times for the industry, and Wachovia in particular. He praised the determination of employees and the company's core businesses that can preserve a “strong and independent” company. He said current management had already taken key steps to fix the bank's problems, but acknowledged more bumps lie ahead.

He and Lanty Smith, who served as interim chief executive and continues as board chairman, spoke in vague terms about building on Wachovia's strength in retail banking and fixing problem assets, with an emphasis on mortgage loans.

They said they'd reveal more details when second-quarter earnings are released July 22.

Steel's installation, meant as a sign of stability, didn't quiet the concerns of analysts, who continued to wonder if the bank would be bought out. On Thursday, shares fell 8 percent to $13.13 – compared to $50.56 a year ago.

Steel spoke from prepared remarks but with a hint of self-deprecating humor. Hundreds of employees gathered for his introduction in the bank's uptown atrium, spilling out the doors.

Though Steel and Smith projected an air of camaraderie, Steel has been hired to clean up a mess for which Smith is partly responsible.

Some analysts wondered if there would be big shakeups in senior management or the board of directors, who have been criticized for being complacent during the ill-fated purchase of Golden West Financial Corp. in 2006. Smith said it would be inappropriate to discuss possible changes to the board on Thursday, since directors have been focused on finding a new CEO.

The appointment of Steel, who served with Smith on Duke University's board of trustees, indicates that Smith will have a high-profile position in the new Wachovia order, said Dick Bove, an analyst at Ladenburg Thalmann.

“Somehow,” Bove wrote, “(Steel) must wrest control of the company from the men who brought the company to its knees.”

Golden West

Smith set the tone for a clean slate on mortgages by acknowledging that the bank blundered when it bought Golden West two years ago. Bank leaders gambled then that Golden West's exotic mortgages would continue to hold up, but they didn't predict the severity of the housing downturn.

“There's been a complete recognition at the board level that Golden West was a mistake and that we have to deal with the consequences of it,” Smith said.

The bank's $24 billion purchase of Golden West at the height of the mortgage bubble tarnished the Wachovia brand name, triggered rising mortgage defaults, and led to longtime CEO Ken Thompson's dismissal June 1.

When Steel was asked if he would divest any of Golden West's assets or operations, he reiterated his plans to identify and fix the bank's problem assets.

The bank expects $500 million in second-quarter charge-offs, or loans it doesn't expect to collect on, from the Pick-A-Payment mortgages it inherited from Golden West. That accounts for almost 40 percent of the bank's total expected charge-offs for the second quarter; another 21 percent is expected to come from commercial real estate.

Cost cutting

Like many financial institutions, Wachovia has announced layoffs this year, including 500 corporate and investment banking positions in April and 50 technology positions last week. Smith said the bank would pursue an “aggressive cost reduction program” and promised more details on July 22. He hinted at a smaller future bank, saying Wachovia would “selectively and cautiously” shrink its balance sheet, particularly its mortgage portfolio.

Steel said he'd be as straightforward with employees as possible. “Some businesses are growing,” he said. “… Some are contracting.”

For shareholders, Smith wouldn't specify whether the bank would need to raise more capital. Wachovia already cut its shareholder dividend by 41 percent this year. In April, it went to the markets to raise $8billion – which can also hurt shareholders by diluting the value of their holdings.

"We're going to look at all the actions available to this company, and it is a long list,” Smith said.

Steel's appointment doesn't mean the bank suddenly won't need to cut its dividend or raise more capital, analysts said. In fact, since the new chief has a license to right the bank, Wachovia could take a “significant charge to ‘clean up' its problems once and for all,” said Gerard Cassidy, an analyst at RBC Capital Markets.

Takeover

Analysts also continued to buzz about the possibility that Wachovia could be bought out. Though Smith has indicated the bank's intent to stay independent, its share price – at levels not seen since the early '90s – makes it an attractive takeover target.

Though hiring a new CEO presumably reinforces that intent to stay independent, analyst Kevin Fitzsimmons of Sandler O'Neill + Partners wondered if Steel would be seen as the man to get the bank in order so that it can be sold for a better price.

Steel's connection to Goldman Sachs – he spent 30 years there before joining the Treasury in 2006 – has further sparked takeover rumors.

Last month, Wachovia confirmed that it had hired Goldman to analyze its loan portfolio. But Steel noted that the Wachovia-Goldman connection was forged before he came to Wachovia, and Smith denied the Goldman takeover rumors.

“It's a one-shot relationship kind of assignment,” Smith said. “It's not a prelude to anything else.”

Other divisions

Steel said Wachovia will build on strengths including its retail bank, which is known for stellar customer relations and accounts for 70 percent of Wachovia's earnings. “There are other organizations that would kill to have Wachovia's core strengths,” Steel said.

Smith indicated that the bank, like many peers, could continue to trim its investment operations, which are Wall Street-style services such as stock and bond offerings. “You will not see Wachovia in the future doing a lot of esoteric structured products,” Smith said. It's important, he added, to “not let your aspirations outrun your capabilities.”

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