Wachovia has $23.9 billion loss on writeoff, mortgages

By Jonathan Stempel

NEW YORK (Reuters) - Wachovia Corp reported a third-quarter loss of $23.9 billion on Wednesday, a record quarterly deficit for a banking company in the global credit crisis, underscoring the challenges Wells Fargo & Co faces when it acquires the big lender.

The loss reflected an $18.7 billion writedown of goodwill because asset values fell, and $6.63 billion set aside for credit losses. Wachovia has lost $33 billion in the last two quarters, roughly the gross domestic product of Guatemala.

"We have weakening in the economy, and loan losses continue to be problematic," said Gary Townsend, co-founder of Hill-Townsend Capital in Chevy Chase, Maryland. But he said "Wells wants and needs Wachovia" to expand and said the merger will "absolutely" go through under its original terms.

Earlier this month, Wells Fargo agreed to buy Charlotte, North Carolina-based Wachovia for $15.1 billion, without any government backing to cover loan losses it said could reach $74 billion. The value of the all-stock merger had fallen to $14 billion as of Tuesday. A fourth-quarter closing is expected.

The purchase would more than double San Francisco-based Wells Fargo's size. It would create the nation's fourth-largest lender, with $1.4 trillion of assets, and biggest retail banking network, with more than 6,600 branches.

John Stumpf, Wells Fargo's chief executive, called Wachovia's quarterly results "very much in line with our expectations." Wells Fargo said the results would not affect its plan to raise $20 billion.

Wachovia's loss was $11.18 per share, compared with a year-earlier profit of $1.62 billion, or 85 cents per share.

Excluding one-time items, the loss was $4.76 billion, or $2.23 per share, eight times the average analyst forecast for a loss of 27 cents, according to Reuters Estimates.

It nearly doubled to $26.1 billion its forecast for losses on a troubled $118.7 billion mortgage portfolio tied to its disastrous purchase in 2006 of California lender Golden West Financial Corp.

Wachovia's loss was roughly twice the $12 billion of red ink that Swiss bank UBS AG reported for the first quarter, one of the banking sector's biggest recent losses.

Shares of Wachovia closed down 38 cents, or 6.2 percent, to $5.71, while Wells Fargo dropped $1.34, or 4.1 percent, to $31.30. The KBW Bank Index, which includes both, fell 5.8 percent.

MARKET ENVIRONMENT CHANGES

Wachovia accepted the Wells Fargo merger just four days after agreeing to sell its retail and investment banking units to Citigroup Inc for $2.16 billion, an agreement that included government backing to limit loan losses.

The dealmaking came less than three weeks after Wachovia Chief Executive Robert Steel said his bank was healthy and planned to stay independent.

But credit worsened, and core deposits fell 8 percent in the third quarter, including a 24 percent plunge from commercial customers.