Wachovia said Friday the value of collateralized debt obligations in its portfolio fell about $1.1 billion in October, making it the latest financial institution to warn of sharp losses last month in the credit markets.
The weakening markets -- which Wachovia estimates could get worse over the last two months of the quarter -- cut the value of the bank's CDO holdings by more than 60 percent. As of Sept. 30, Wachovia had $1.8 billion in CDO exposure; after the writedowns, the exposure is now $676 million.
CDOs are complex instruments that combine slices of different kind of risk. CDOs are often backed, in part, by subprime mortgages -- loans given to customers with poor credit history. As those mortgages have increasingly defaulted, the value of the CDOs has plummeted.
Wachovia has an additional $2.1 billion of exposure to more traditional subprime mortgage-backed bonds. The value of those holdings remained steady in October as hedging strategies offset losses.
In a regulatory filing with the Securities and Exchange Commission, the financial services provider said the market in November so far remains "extraordinarily volatile."
The company plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in the housing market in certain regions. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.
Analysts polled by Thomson Financial, on average, were forecasting earnings of $1.08 per share for Wachovia before the writedown announcement.
Last month, Merrill Lynch took $7.9 billion in subprime mortgage-related writedowns for the third quarter, less than three weeks after saying it losses would only amount to about $4.5 billion. Merrill blamed further October market deterioration for the increased loss.
Mortgage-related writedowns across the banking industry eclipsed $40 billion during the third quarter, and the fourth quarter is already shaping up to be just as bad, if not worse.
Wachovia is the third national financial institution to announce fourth-quarter writedowns eclipsing $1 billion. Citigroup said it will likely take between $8 billion and $11 billion in writedowns during the fourth quarter, while Morgan Stanley said it will take up to $6 billion in writedowns during its fiscal fourth quarter, which ends Nov. 30.
Shares of Wachovia fell $1.60, or 4 percent, to $38.70 in premarket trading. Shares have traded between $38.47 and $58.80 during the past year.