In recent months, Wachovia Corp. has tried to shore up its finances by slashing its dividend, walling off its troubled portfolio of option adjustable-rate mortgages, beginning modest balance-sheet reductions, and cutting jobs.
Robert Steel, who became chief executive in July, said Tuesday that the Charlotte banking company still has room to maneuver by further paring assets and expenses. But the threshold at which such cuts would become painful is not far off, he said.
"I always find that when you start these exercises … whether it's people or reduction of balance sheet … the first 5%, 6%, 7%, 8% is kind of 'good housekeeping'," Mr. Steel said. "It's like, 'no dessert for a couple weeks.' That's good and easy. … But it's not really getting at the issue."
Wachovia is not currently contemplating any radical steps, he said.
The $812.4 billion-asset company could move beyond the types of actions it has already announced by "selling more substantial assets, and you can also raise equity," Mr. Steel said. But "the problem with [reducing the] balance sheet is that you're starting to cut into really good assets."
(Raising equity would also dilute existing shareholders' stakes, which has been a problem for several financial companies this year.)
In July Wachovia said it was reducing its dividend by 87%, to 5 cents a share. Now that the company has pulled "the dividend lever," Mr. Steel said Tuesday, "I got no more yank there."
Though Wachovia is "in the process of evaluating several assets," he said, "I don't want to play this bigger-than-a-breadbox-type-thing" by dropping hints about which assets are under review.
"Basically what we're looking at are things of the several hundreds of millions of dollars, not … billions of dollars," he said. "We do have things that we think are in process that are good at the margin, but they're not game-changers."
Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said he thinks Wachovia "absolutely" will have to raise capital.
"Wachovia's hoping that it continues to be able to earn" enough to cover provisions "over the next several quarters," Mr. Patten said, but prospects for doing so might be confounded by severe economic headwinds. "It's anybody's call on where the consumer goes. It's anybody's call in terms of where housing bottoms."
Mr. Steel, who left his post as a Treasury Department under secretary to take the job at Wachovia, said he is still getting his arms around the enterprise.
In response to a question about the "quality of liquidity modeling at Wachovia" in an environment of tight credit markets, Mr. Steel said, "I'm just under 60 days in. We have a new CFO who's joining within weeks." (Wachovia announced Monday that David Zwiener, most recently a managing director at Carlyle Group, will join the company as chief financial officer on Oct. 1. CFO Thomas Wurtz had announced plans in July to leave the company.)
"To tell you that I had it all buttoned up and could raise my right hand to you with complete confidence today would be disingenuous," Mr. Steel said. "But we're on the case."
Since last month, Wachovia has announced more than 10,000 job cuts, and Mr. Steel said that 87% of the affected employees have been "identified and notified." He reiterated the company's projection that the reductions would result in savings of $1.5 billion next year and said Wachovia is on track to cut securities and loan balances by $20 billion this year.
He also stood behind the company's projection that its $122 billion option-ARM portfolio — a legacy of its October 2006 purchase of Golden West Financial Corp. — would rack up cumulative losses of 12%, or $14.6 billion.
"We have another month or so of information" since making the forecast, he said. "The latest data we have does not offer any perspective different than what we had had previously."
Wachovia is approaching the portfolio "as if we were a distressed-investment manager," Mr. Steel said, and it has separated the loans from the rest of its mortgage business. A slide accompanying his presentation said the company intends to make "initial contact" by yearend with all borrowers in the portfolio to discuss refinancing.