Wachovia Taps Steel as CEO; Warns on Huge Q2 Loan Loss Provision

Wachovia Corp. (WB) said late Wednesday that it had named Robert Steel its new CEO, president and member of the board of directors — a move that has met with mixed reaction from analysts thus far. Steel was until very recently the under secretary for domestic finance at the U.S. Treasury, and a confidant for Treasury chief Henry Paulson. Both men are alums of Goldman Sachs Group (GS). Lanty Smith, who had been serving and interim CEO, will continue in his role as Wachovia’s chairman of the board, the bank said. But if it’s possible to overshadow the announcement of a new CEO, Wachovia came painfully close to doing so by tying Steel’s appointment to a warning on expected large losses at the North Carolina-based bank when it reports its upcoming Q2 results on July 22. Wachovia said it expects to report an after-tax loss of between $2.6 and $2.8 billion, or $1.23 to $1.33 per share, for the second quarter — an estimate that excludes any goodwill impairment charges. And given the unmitigated disaster that represents the bank’s $25 billion purchase of option ARM specialist Golden West Financial in 2006, does anyone really think a huge goodwill charge won’t materialize? The bank said the loss would primarily come as it sets aside an additional $4.2 billion to build its loan loss reserves — a figure well above most analyst expectations — $3.3 billion of which would be tied to Wachovia’s infamous Pick-a-Pay mortgage product. The bank said recently that it had halted production of the option ARM product amid mounting losses. Charge-offs were estimated to have rised to $1.3 billion, or 1.10 percent of loans, including $500 million in charge-off activity tied to those pesky Pick-a-Pays. The bank holds a substantial $170 billion residential mortgage portfolio; a whopping $121 billion of that total was in the form of option ARMs at the end of Q1. Wachovia’s option ARM portfolio saw non-performing assets jump by $1.6 billion in just one quarter to $4.6 billion at the end of Q1, almost 4 percent of loans; analysts expect that number could be as high as $7.5 billion when the company reports its Q2 results. Wachovia shares were off 5.67 percent, at $13.48, when this story was published. Disclosure: The author held various put option contracts on WB when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.