Are we there yet? Are we?
The last vestiges of the mortgage crisis are finally upon us, as evidenced by the failure of IndyMac (IMB) and crumbling of giants Fannie Mae (FNM) and Freddie Mac (FRE).
Shares of Fannie Mae and Freddie Mac rose in early action as U.S. lawmakers moved closer to approving a plan to bail out the hard-hit financial institutions (see also, “Fannie Finally Gets Off Its Fanny?)
Recently, we’ve even seen banking giants like Wells Fargo (WFC) and Bank of America (BAC) report better-than-expected earnings with BAC not only increasing its dividend, but also buying back an estimated 75 million shares (see also, “Wells Fargo (WFC) Turning the Tide“).
Wachovia Corp. (WB), the nation’s fourth-largest financial institution, announced earnings that missed expectations due to credit losses that were greater than expected. The news sent shares tumbling by more than 10% in the premarket trade and reignited fears of a collapsing banking system.
Will there be another run? It’s highly unlikely in my opinion.
While the news at Wachovia is bad, the results could have been a lot worse. From my perspective, WB is going through a process that, when complete, will result in a stronger company in the long run. The pundits who expect WB to fail, should simply move on to another carcass.
Yes, WB lost $1.27 per share, not far from the expected loss of $1.30. But the big problem for WB is the hangover from the $24.2 billion purchase of Golden West Financial in October, 2006.
And, yes, you read that right.
Wachovia decided to buy a company that specializes in adjustable rate mortgages well just in time for the housing market implosion. (Such a move has to rank up there with some of the biggest corporate blunders ever, but I digress…that was then and this is now.) Management responsible for the failed deal has also been vanquished and replaced with a new leader, Robert Steel. For those not familiar with Mr. Steel, he was not only an ex- Goldman Sachs, investment banker, but the former U.S. Treasury undersecretary for domestic finance. That alone should frighten banking speculators regarding the ultimate demise of WB. The government—and Steel—will simply not let that happen.
In order to right the ship, WB announced that it was slashing its dividend to a nominal $.05 per share, a cut of 87%. In addition, the company is eliminating more than 10,000 jobs. Wachovia has stated that its Tier 1 capital ratio at the end of the quarter was 8%. Bank regulators consider 6% sufficient.
Again, the financial condition of WB is not good, but this is exactly the time Rational Investors should be buying shares. Use Wachovia’s weakness to establish a position if you have the luxury of a long-term time horizon. The stock closed higher yesterday at $17.65. While the bank may fail, the potential reward justifies the risk in a well-diversified portfolio. That’s my Rational opinion.
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