Losses drive Wachovia to government-backed lending
WASHINGTON (Reuters) - Wachovia Corp has increasingly relied on government-backed lending channels as losses mount and drive up the bank's borrowing costs in the conventional capital markets.
The fourth-largest U.S. bank increased its borrowing from two Federal Home Loan Banks to $53.2 billion in the first quarter -- the most recent quarter available -- from $41.4 billion as of the end of 2007, according to filings with the Securities and Exchange Commission.
Wachovia was able to tap the U.S. Federal Home Loan Bank of Dallas for a fresh $4 billion and its sibling bank in San Francisco for $7.82 billion through ties left in place after Wachovia's disastrous $24.2 billion purchase of Golden West Financial Corp in October 2006.
That acquisition has been widely criticized, but it did leave the Charlotte, North Carolina-based bank with access to a lending pipeline that has recently become valuable.
Wachovia's borrowing costs have shot up amid a global credit crunch sparked by home foreclosures.
Golden West specialized in mortgages that proved to carry greater risks than expected, and Wachovia is now saddled with those assets.
Three credit rating agencies downgraded Wachovia on Tuesday, citing increased expectations of losses in the bank's mortgage portfolio and reduced flexibility to raise capital.
The downgrades followed Wachovia's announcement earlier on Tuesday of an $8.86 billion second-quarter loss as it also slashed its dividend and proposed job cuts after losses tied to mortgages soared.
TAPPING THE HOME LOAN LENDER
Wachovia is not alone in its penchant for borrowing increasing amounts lately from the Federal Home Loan Bank system. As the credit crunch has tightened in recent months, many large banks have increasingly relied on the system.
The FHLB system is a network of 12 regional banks that offer financing to mortgage lenders without direct access to global capital markets.
"The Federal Home Loan bank (system is) an important part of the financial landscape and our borrowings from this entity are consistent with industry practices," Wachovia spokeswoman Christy Phillips-Brown said in a statement.
The federally chartered system has never experienced a credit loss on its loans -- known as "advances" -- even through the peak of the damaging savings and loan crisis of the late 1980s. Still, increased use of the system can be a sign that other funding options are too costly for a member bank.
Citibank, the flagship bank of Citigroup, has the most advances with $88.53 billion at the end of the first quarter, according to Home Loan Bank data. Between its borrowing from the Dallas and San Francisco banks, Wachovia holds the second position and Washington Mutual Inc is third with $51.95 billion at the end of March.
Wachovia had not shown much interest in the Federal Home Loan Bank System before the Golden West acquisition, although it did have $2.5 billion in advances from the Atlanta Home Loan Bank that stemmed from its merger with First Union Corp. in 2001.
Wachovia is a member of its local Atlanta home loan bank but is not a major borrower, according to securities filings.
In November, Countrywide Financial Corp, which was purchased by Bank of America Corp, turned to the Atlanta bank for liquidity when other channels were closing.
Sen. Charles Schumer, a New York Democrat and a member of the Senate Banking Committee, said in November that Countrywide was treating the FHLB system "like its personal ATM," having borrowed $51.1 billion as of September 30.
Wachovia increased its borrowing from the Dallas bank by 19 percent and the San Francisco bank by 25 percent at the end of the first quarter.
Data on Wachovia's second-quarter borrowing from the Federal Home Loan Bank system will be available in mid-August.
(Reporting by Patrick Rucker in Washington; Anastasija Johnson, Jonathan Stempel and Dena Aubin in New York; Editing by Jan Paschal)
