Wells Fargo faces massive to-do list

In its planned acquisition of Wachovia, Wells Fargo will have some big decisions to make on what operations to keep, expand, pare back or abandon altogether.

Analysts have started to speculate that Wells could get rid of Wachovia's corporate and investment bank – an area that San Francisco-based Wells has long shunned. Others wondered what steps Wells will take to deal with the losses piling up in Wachovia's mortgage unit.

So far the banks have said little about their plans, and spokespersons for both companies said Monday it is too early to talk about them. The deal is expected to close later this year.

Wells Fargo chief executive John Stumpf is scheduled to get a closer look at Wachovia's operations on a visit this week to Charlotte. The trip will include visits with executives today and “employee welcome events” on Wednesday.

Stumpf will speak to employees at the Atrium in Wachovia's headquarters complex at 11 a.m. Wednesday and at the University area customer information center at 2 p.m.. Stumpf will visit other Wachovia sites around the country later in the week, a Wachovia spokeswoman said.

Here's a look at some of the operations Wells Fargo will be examining when it takes over Wachovia:

Investment banking

Unlike most large banks, Wells Fargo has only dabbled in investment banking, which encompasses Wall Street-style services such as stock and bond offerings and merger advice. The bank has found it riskier than the bread-and-butter consumer services it has thrived on.

Wells Fargo executive vice president Bruce Helsel said in March the company was unlikely to build its investment banking business, calling it “tough to integrate.”

“We're not sure we understand the investment banking business well enough to make it work,” Helsel said, speaking at an institutional investors conference in Orlando.

Wachovia has more than 6,300 employees in its investment banking unit, which has a large presence in Charlotte and is a source of high-paying jobs.

Like most peers, Wachovia has been scaling back this unit as business dries up and profits get less certain amid an ongoing credit crunch. The Wachovia unit's earnings were down 73 percent in the second quarter, and it lost money in the previous two quarters. Wells, a conservative bank that has weathered the market turmoil better than most, is wary of getting into such an uncertain business, several analysts said Monday.

But Guy Cecala, publisher of Inside Mortgage Finance, said that Wells might be glad to keep the investment bank, even if it wasn't the driver of the purchase. When a bank makes a mortgage loan, it usually turns around and sells it as a security through an investment bank, rather than keep it on its own books. That frees up the bank to make more loans.

Wells, one of the country's top mortgage lenders, might find it convenient to have its own investment bank rather than rely on third parties to sell its mortgage securities. “It's like if you're making bread, and have no way to sell it, so you've got to go through the stores,” Cecala said. “At some point, it makes sense that you get some stores.”

Besides, said Jaime Peters, an analyst at Morningstar, “I'm not sure who's really in the mood to buy an investment bank right now.”

If Citigroup Inc. had prevailed in its failed bid for Wachovia, analysts suspect that most of Wachovia's investment banking jobs would have been eliminated or moved to New York, where Citi is headquartered. Many employees favored the Wells deal because they figured it would at least consider keeping the corporate and investment bank.

Within the unit, riskier trading functions would likely be in more danger, as opposed to areas more focused on helping corporate clients raise money or do deals.

Consumer banking and headquarters

Wachovia, like Wells, is known for its strong consumer banking unit. Wachovia's footprint, heavy in the Eastern U.S., gives Wells the chance to create a retail powerhouse that will have more branches than any other bank. The combination will also make the new Wells Fargo No. 1 in deposits in 17 states including California, traditionally a stronghold of Bank of America.

In the second quarter, when Wachovia overall lost $9.1 billion, the retail bank made a profit of $1.1 billion.

All this means that Wells isn't likely to cut very much of Wachovia's retail banking presence, except perhaps in some areas of Wells' home turf of California, where Wachovia has been expanding. Bart Narter, a senior vice president at the Celent research firm, said Wells has about 1,000 branches in California to Wachovia's 176.

He is less concerned about potential overlap in Texas, where Wells has more than 500 branches and Wachovia has more than 200, because each bank has less than 5 percent of deposits there.

The bigger question, analysts said, will be who keeps back-office and technology jobs. Wachovia employs about 20,000 workers in Charlotte, many at its corporate headquarters uptown, and those could be the jobs that are most in danger.

“You don't need two personnel departments, you don't need two finance divisions,” said Gerard Cassidy, an analyst at RBC Capital Markets. “They will still have a material presence in Charlotte – it's just not going to be that large.”


Wells Fargo was the country's top mortgage servicer in the second quarter, servicing $1.5 trillion in loans, according to Inside Mortgage Finance. Wachovia had a small fraction of that – $201 billion.

Wachovia's mortgage unit has also been the root of its downfall, given the bank's $24billion acquisition of mortgage lender Golden West, which it bought in 2006 at the peak of the housing bubble. This summer, the bank eliminated its most exotic loans, slashed jobs and is trying to refinance some borrowers into new loans.

Analysts agreed that Wells may have to trim Wachovia's mortgage unit as it brings Wachovia's standards in line with its own.

“The Wells Fargo model will clearly be the survivor here,” said Robert Patten, an analyst at Morgan Keegan.

Cecala predicts that most cuts in Wachovia's mortgage unit will come at the executive level, not in the branches that are making the loans.

Capital management

Wachovia is a much bigger player in the stock broker business than its buyer, with about 15,000 Wachovia Securities financial advisers, compared to Wells' 2,500. In mutual funds, Wells has the edge with $151 billion in assets to $86 billion in Wachovia's Evergreen funds, according to August data compiled by the Investment Company Institute trade group.

When Wells Fargo announced its surprise bid for Wachovia on Oct. 3, Wells chairman Dick Kovacevich noted the value of these Wachovia units, which Citigroup had not planned to buy.

Those units, he said, “are tightly interwoven with Wachovia's core banking business – and this agreement avoids the complexity and unavoidable loss of value in trying to separate them, which would have disrupted Wachovia's team members and customers.”

Patten said that Wells, though it's not heavy in capital management, could be open to expanding through Wachovia's relatively conservative unit, which has been boosted by recent acquisitions, including A.G. Edwards.

“It's a Southern model,” Patten said. “It's focused on the retail client, not the big institutional investor.”

Bloomberg News contributed.
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