The Simplified Investor

It seems curious at first when a bank reports losses of $9B, as Wachovia (NYSE:WB) did today, and its stock price isn’t punished. It’s even more counter-intuitive when the company’s stock price goes up, as it did after Wachovia said it lost $8.9B in the second quarter of 2008. Despite the sour news, Wachovia was up over in 15% this afternoon on the New York Stock Exchange. Why are investors rewarding the beat-up bank with a share price boost? A closer look at Wachovia’s recent history helps solve the WB mystery and explains why its investors are still riding high.

The struggles of the financial services industry in 2008 have been well documented. Banks that invested heavily in the mortgage business got burned when home values began declining in 2007 and one subprime loan after another went bust. While everyone was hit hard, even the biggest names like Bank of America (NYSE:BAC) and Citigroup (NYSE:C), many analysts expected smaller, regional banks like Wachovia and Washington Mutual (NYSE:WM) to be hit the hardest.

Wachovia’s stock was punished in the first half of 2008, falling 75% from its highest point on February 1 to a low of just over $9 a share on July 15. That low point followed the company’s announcement earlier in the month that it would lose up to $2.8B in the second quarter 2008. That number corresponded with the bank’s earnings report on July 22, when it booked a loss of $2.67 in tangible assets. The rest of its losses were $6.1B in intangible value - a large chunk of it a goodwill write-down of the company’s nightmare acquisition, Golden West Financial Corp.

Wachovia bought the mortgage lender for $25B in 2006, but Golden West’s value has evaporated because of the bad loans on its books. Investors hated the deal so much that Wachovia’s market cap fell by $1B in May 2006 when the acquistion was announced, and they really punished Wachovia in 2007 while the bank raised capital to cover the losses of Golden West’s defaulted mortgages. Today’s writedowns are another sign that Wachovia will make concessions to its angry investors under CEO Ronald Steel, a veteran of the Treasury Department and former vice chairman at Goldman Sachs Group (NYSE:GS) who was appointed in July 2008 to clean up Wachovia’s messes. Steel has vowed to remove Wachovia from the mortgage business and to raise capital to cover future losses from bad loans in California and Florida (the two areas of the country hit hardest by subprime).

So what Wachovia reported today was that it had lost almost $9B, and that it continued to expect losses in the future. And yet, investors rewarded the stock with a 20% price boost. It seems it’s all about confidence on Wall Street, and investors are behind Steel and the direction he’s taking at Wachovia. As confidence goes, so does share price, and WB holders can thank the market’s fickle nature for their unexpected big day.

Tags: Banks, Business, Finance, Investing, Money, Stocks, Subprime Lending, Wachovia, Wachovia Bank

This entry was posted on Tuesday, July 22nd, 2008 at 11:32 am and is filed under Financial Services, Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.