Wachovia shares nosedive amid rising bank concerns
Monday September 15, 1:05 pm ET
Wachovia shares nosedive on heightening concerns about bad loan exposure, capital
CHICAGO (AP) -- Wachovia Corp. shares plummeted Monday amid intensified concerns on Wall Street about big banks' exposure to bad mortgage loans.
Shares of the fourth-largest U.S. bank, already down more than 70 percent from a year ago, tumbled another $3.12, or 21.9 percent, to $11.15 in afternoon trading.
The steep decline reflected investors' anxiety about the financial sector in general and banks in particular after the credit crisis claimed two storied investment firms. Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection after failing to find a buyer over the weekend, and Merrill Lynch & Co. sold itself to Bank of America Corp. to avoid a similar fate.
Analysts raised questions about the potential need for Wachovia to have to raise new capital to absorb future credit losses.
Mike Mayo of Deutsche Bank downgraded the stock to "Hold" from "Buy," concerned about Wachovia's large portfolio of risky option adjustable-rate mortgages, which he called a wild card in analyzing the company.
"Our view has been that Wachovia does not need more capital," he said in a research note, since he thinks loan losses over the next few years will be less than expected. However, given increased concerns about economic growth and intense stress in financial markets, "this margin of safety has been reduced."
"If the market senses even a chance that Wachovia needs new capital, its stock could get punished, starting a downward spiral," Mayo said.
Wachovia's current problems result mostly from its $25 billion purchase of mortgage lender Golden West Financial Corp. in 2006 at the peak of the housing boom. It thus inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.
Morgan Keegan analyst Robert Patten upgraded Wachovia to "Market Perform" from "Underperform" given the recent sell-off in shares, setting a price target of $12.50.
But he said he still expects that Wachovia may have to raise capital, "especially if the housing markets were to worsen materially as we head into 2009."
