Wachovia reportedly in talks with Citigroup as shares plummet

Posted September 26, 2008 2:45 p.m. EDT
Updated September 26, 2008 8:25 p.m. EDT

— Shares in troubled financial giant Wachovia (NYSE: WB) plunged nearly 39 percent Friday afternoon as Wall Street awaited news on a potential bailout from Washington and concerns mounted about the nation’s banking system.

The New York Times reported Friday that the Charlotte-based bank has started talking with Citigroup Inc. about a possible merger.

"If that happens, then would we lose, potentially, the headquarters of Wachovia in Charlotte to New York City? If that were to occur then that would be a blow, I think, to North Carolina's status as a financial services center," North Carolina State University economist Michael Walden said.

On Thursday night, federal regulators shut down Washington Mutual and sold its assets to JP Morgan Chase & Co. in what is called the largest bank failure in U.S. history.

News services Dow Jones and Bloomberg, as well as Barron’s, reported Friday that Wachovia was undergoing similar scrutiny by investors. Mounting concerns drove Wachovia’s share price down $3.70, a loss of 27 percent, to close at $10.

Shares surged up $1.60 in the last half-hour of trading on speculation of a possible deal with Citigroup.

The plunge in Wachovia’s share price could make the bank a takeover target, Walden said.

“Depositors should be OK. Shareholders should worry,” Walden told “Charlotte should be concerned because the lower value increases the chances of a takeover."

Federal insurance covers traditional bank accounts of $100,000 or less.

"If there are enough people who lose confidence because of these rumors, the rumors can be self-propagating," said Steven Schwarcz, a professor of law and business at Duke University.

The share-price plunge led Wachovia’s new chief executive officer, Robert Steel, to issue a statement in an attempt to reassure shareholders and customers.

“Our core franchises are extremely valuable and continue to operate well relative to our competition,” he wrote. “We remain optimistic that our leadership in Washington will provide comfort to the markets with a plan to stabilize the housing and short-term funding markets.”

Wachovia posted the statement on its Web site before Wall Street closed trading for the day.

Before Steel’s statement, one Wall Street analyst cut his target price of Wachovia shares to $11 from $16.

"We feel it is likely that Wachovia will need to issue equity to provide greater reassurance about its liquidity and solvency,'' Mike Mayo, an analyst at Deutsche Bank AG, told Bloomberg Thursday.

Wire services closely documented Wachovia’s share-price tumble.

“The seizure of Washington Mutual Inc. is quickly becoming a problem for Wachovia Corp,” wrote Dow Jones.

"Wachovia is obviously trading down in sympathy," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners, in a telephone interview with The Associated Press. "Investors are looking for who else out there has a large exposure to mortgage assets that potentially could be written down to a significant degree."

Wachovia's current problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

"The fundamentals at Wachovia right now are not real strong. There is no question about that," said Joe Keetle, senior wealth manager at Dawson Wealth Management, who previously spent 25 years at Wachovia. "But the reaction today has more to do with WaMu going under and waiting for Congress to pass a bill. It's more emotional reaction today."

The home-mortgage crisis is at the root of the unfolding financial meltdown on Wall Street that the Bush Administration is seeking to bail out with a $700 billion package.

“We are in a financial situation that we haven’t seen in many, many decades. I think that is why this so-called bail out is important because I think the federal government has tried many methods to get the financial system back in order and it has not worked,” Walden said.

Barron's described the billions of dollars in adjustable-rate home mortgages on Wachovia's books as “among the least-liquid securities in the credit markets.”

The bank, which ousted its chief executive officer in July as the home mortgage crisis mounted, also faces increasing costs for insurance to cover its own debt.

Over the past year, Wachovia shares have lost some 80 percent of their value.

Still, although the feeling on Wall Street is that Wachovia is hurting, it's not in the same dire straights as WaMu had been before it was seized by the FDIC. Wachovia has even been mentioned as a possible merger partner for Morgan Stanley.

"It has more mortgage-backed securities than some other banks, but is certainly not the worst off in that regard," Schwarcz said.

The bank may need to raise additional capital or speed up its turnaround plans in some way to soothe investors in the short-term, analysts said.