Wachovia Corp.'s fall from banking grace is to many observers tied inextricably to its ill-timed acquisition of Golden West Financial Corp.
The line connecting the two is straight enough: Golden West's heavy reliance on option adjustable-rate mortgages loaded Wachovia's balance sheet with them almost precisely at the time the cyclical credit-quality tide was turning against the product.
But it is also true that Wachovia has faced a host of other problems. Some of the biggest: $4.7 billion in charges from structured products and leveraged loans, $4.1 billion in provision expense for loans outside the option ARM book, and $6.1 billion in goodwill impairment charges associated with commercial-related businesses. More hits have come from legal reserves, tax issues, securities losses, and merger-related charges.
The long list of setbacks left the company in a deep hole and ill-equipped for adversity. Analysts noted its tangible capital ratio was on the decline and stood at 4.8% before it announced the Golden West deal in May 2006.
In the past year the $812 billion-asset Wachovia has racked up more than $25 billion in charges and losses. Roughly a fourth of the total came from loan-loss provisions tied to its so-called pick-a-payment portfolio. Wachovia has said the $122 billion book could have total losses of $14.6 billion, though some analysts believe the hit could be worse.
"Would they have been in the same situation today excluding Golden West? Probably not, but they would have still been in a situation that was clearly impaired," said Frank Barkocy, the director of research at Mendon Capital Advisors.
"Who knows if the consequences would have been the same? Some of their other problems were likely to linger if not accelerate over time."
Wachovia also ran afoul of regulators and the Internal Revenue Service on several fronts. Many of those issues emerged in the second quarter, when Wachovia increased its legal reserves by $1.2 billion to address settlements tied to auction-rate securities sales, took a $975 million charge associated with its accounting for leveraged lease transactions and agreed to pay up to $144 million to settle issues involving its relationship with telemarketers.
Analysts hit on another long-standing complaint about Wachovia: that the management team under G. Kennedy Thompson lacked the appropriate controls and overreached in its expansion efforts.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said: "They had a mentality that they wanted to be part of the trillion-asset club. It wasn't just Golden West and the pick-a-pay portfolio."
Gary Townsend, the chief executive of Hill-Townsend Capital LLC, said the numbers support a view that at the very least, Golden West represented the tipping point for Wachovia.
"It is hard to imagine anything else that would have been big enough to bring them to their knees," he said Tuesday. "It led to much higher nonperforming assets and caused their cost of funding to go up measurably."
But most also agreed that if Golden West had been Wachovia's only problem, a different outcome would have been possible.
"I think that it was the catalyst for the end, but it was not the sum total of all the things that happened," said Nancy Bush, the president of NAB Research LLC. "Wachovia could have survived Golden West if Ken Thompson had set up triage sooner," she said.
"It was a function of a balance sheet hugely distorted with bad credits, a former management team that was late to recognize everything they had gotten into, and a new management team that was in disarray," Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said in an interview Monday.
Mr. Thompson was ousted as chief executive June 1 and succeeded by Robert K. Steel, a former Treasury official, July 10. Wachovia also announced in July that chief financial officer Thomas Wurtz and chief risk officer Donald Truslow, who had served under Mr. Thompson, would leave the company. (Their successors joined the company last month.)
Efforts to reach Mr. Thompson this week were unsuccessful, and a Wachovia spokeswoman would not comment beyond a statement Monday by Mr. Steel attributing the decision to sell the bank to Citigroup to a financial landscape that had "changed significantly and presented us with unprecedented challenges." A Citi spokesman said he would not comment.
Analysts had expressed reservations that Mr. Steel, a former Goldman Sachs Group Inc. executive, had never managed a commercial bank, which may have made it difficult to navigate credit markets that virtually froze after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.
Mr. Steel did not sit idle after joining Wachovia. In mid-July he outlined a number of initiatives designed to save more than $5 billion in capital, including a $20 billion reduction in assets, cutting 10,000 jobs, and another reduction in the company's dividend. In the summer, a certificate of deposit promotion brought in deposits of $20 billion.
Citigroup, in discussing its exposure from buying Wachovia's banking operations, said Monday that mortgages make up half of the $312 billion in projected risk assets. Another 32.1% is tied to commercial real estate and some 17.9% was tied to "other assets" that Citi did not identify during its conference call on the deal.
Wachovia has not said what prompted its decision to sell its banking operations, though the Federal Deposit Insurance Corp.'s involvement in the Citi deal has led many analysts to the belief that a liquidity crunch was forming.
"The answer always lies in funding," Mr. Cassidy said.
Mr. Barkocy said "the environment has changed dramatically" since the Lehman bankruptcy, "placing an additional pressure point that has compounded issues at many financial institutions. Would Wachovia have been in an independent-survival mode absent that? Probably so. In many ways, I think the whole Wachovia story just kind of fed on itself."