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Paul Kiesel
Paul Kiesel
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Wachovia and Others Preparing for a Rainy Day

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Wachovia is the latest financial institution to seek outside financing from foreign and private equity investors. Today, the company reduced its dividend and said that it would raise about $7 billion, which is exactly what Washington Mutual secured from investors at the buyout firm TPG, last week. Citigroup, Merrily Lynch and UBS all raised billions of dollars last fall in similar moves. These deals or bailouts have come after many of these same companies expanded their retail franchises and moved into certain housing markets, California in particular, and acquired assets from other mortgage lenders that specialized in interest-only mortgages.

 

For instance, in May 2006, Wachovia made a big bet on the California housing market when it acquired Golden West Financial for $25.5 billion. The risks at the time were played down, but the transaction had been openly questioned by Wall Street analysts as the housing market appeared to be peaking. There is a direct correlation to Wachovia’s losses for the first quarter of this year, $393 million, and the impending foreclosure boom. G. Kennedy Thompson, Wachovia’s chairman and chief executive said, “We believe our investors will be best served by preparing for a worst-case scenario,” (The New York Times, 4/14/08). The worst-case scenario that Mr. Thompson is alluding to is the fallout from Wachovia’s poor investment into the interest-only mortgage market. On top of that, the mortgages that were written by lending companies like Wachovia and Washington Mutual (or mortgages that were purchased and sold off by Wachovia and WAMU) did not properly disclose vital information to the borrowers that could have helped prevent this looming financial crisis. Federal investigation is underway into these dubious lending practices, which is not going to bode well for Wachovia or any of the other mortgage lenders. Once shareholders fully understand the ramifications surrounding any and all of the pending lawsuits these companies face, there will be a shotgun sale of stocks and this could be tumultuous to the overall health of the stock market, if not the entire economy.