Wachovia Corp. chief executive Bob Steel tipped his hand on plans for turning around the Charlotte bank, though he cautioned that he doesn't have everything worked out yet.
Speaking today at a financial services conference in New York, Steel detailed strategies – some already in place - for cutting expenses, increasing liquidity and tackling problems in the bank's $122 billion mortgage portfolio inherited from Golden West Financial Corp., which has been the root of many of Wachovia's troubles.
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“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 to you with complete confidence today … would be disingenuous. But we're on the case.”
Steel, an alum of Goldman Sachs Group Inc. and the U.S. Treasury, was brought in to turn around a bank that has lost money for two consecutive quarters. Steel has moved quickly to put his stamp on the management team: Late yesterday, he announced his pick for chief financial officer, Carlyle Group executive David Zwiener.
Today, he reiterated familiar themes of Wachovia's core business strengths and long-term optimism. Wachovia, the country's No. 4 bank by assets, has a strong brand name and a long-held reputation for customer service. Revenues in the general bank, wealth management, and corporate and investment banking are up, and Steel – as he did on his first day on the job – pledged to be forthcoming as he tackled problems.
Costs: Steel provided more detail on the bank's efforts to save more than $6 billion by the end of next year. Wachovia has already slashed its quarterly dividend payout, cut jobs and trimmed the balance sheet. It is considering selling certain “non-core” 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.”
In July, the bank announced it would cut about 6,950 employees, as well as eliminate 4,400 open positions and contractors. 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.
The bank has also moved decisively to strengthen liquidity. It has sold $1.3 billion of auction-rate securities, which it took on as part of a recent settlement with regulators, and said it would reduce trading account assets and reinvest fewer of its maturing securities. In two months this summer, it grew CD deposits from $113.9 billion to $132.3 billion.
Fannie and Freddie: Steel said that Wachovia sold $509 million worth of Fannie Mae and Freddie Mac preferred shares in July, at a loss of $171 million. The bank now has no exposure to shares of Fannie or Freddie, the federally chartered mortgage giants that the U.S. government seized over the weekend. Other banks are expected to detail their exposure to Fannie and Freddie preferred shares when third-quarter reports are released.
Steel said Wachovia could benefit from the government takeover of Fannie and Freddie. “If (Treasury) Secretary Paulson's plan was to give confidence to capital markets, and also be encouraging to the mortgage markets at the lowest taxpayer price, then we're a beneficiary – we're geared to that outcome, would be a fair description.” Steel said the takeover is “certainly a new wild card” for the economy. He expects the economy to continue to grow this year, though at lower-than-normal rates.
Golden West: Steel also detailed plans to essentially spin off the troubled mortgage portfolio inherited from Golden West, a California lender that Wachovia bought two years ago at the height of the housing market. Steel is assembling a swat team of senior bank leaders, led by Wachovia veteran David Carroll, to approach the Pick-A-Pay portfolio as if they were investors trying to squeeze value out of a distressed asset, he said.
That will free up the legacy mortgage employees to focus on traditional customers, Steel said. He 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.
Wachovia has already ceased making Golden West's Pick-A-Pay loans, and is cutting mortgage employees. More than 900 other workers will be reassigned to help Pick-A-Pay customers refinance and restructure their loans; those operations should be up and running by next month.
The bank plans to contact all Pick-A-Pay borrowers by the end of the year to talk about refinancing options.
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.”