Wachovia Corp, the fourth-largest U.S. bank, named Treasury Undersecretary Robert Steel chief executive on Wednesday, and said mortgage and legal problems will result in a $2.6 billion to $2.8 billion second- quarter loss, much larger than many analysts expected.
Chuck Burton
A Wachovia branch bank is shown in a Charlotte, N.C. file photo from July 20, 2006. After a rough year, the banking industry appears headed for another in 2007. (AP Photo/Chuck Burton, File)
Steel, 56, had been the Treasury Department's undersecretary for domestic finance since October 2006 and has played a key role in helping Treasury Secretary Henry Paulson try to address the nation's housing crisis, a big cause of Wachovia's current problems.
Like Paulson, Steel previously worked at Goldman Sachs Group , retiring as vice chairman in February 2004.
Wachovia said the quarterly loss will equal $1.23 to $1.33 per share, excluding an expected write-down of goodwill that will not affect capital levels. Analysts on average expected a profit of 19 cents per share, according to Reuters Estimates.
Steel's hiring ends more than five weeks of leadership uncertainty at Wachovia , following the ouster in early June of Ken Thompson as chief executive.
It may also dampen speculation that the Charlotte, North Carolina-based bank might be sold soon. Lanty Smith, who will remain chairman and led the search for Thompson's replacement as interim chief executive, affirmed his commitment to Wachovia's independence on Wednesday.
"At least now the market knows how big the losses are going to be and having a number is better than having no number," said James Ellman, president of hedge fund Seacliff Capital in San Francisco. "But it may also be a negative for the stock, because many of us had thought Wachovia would be sold. If you put a new CEO in place, it means the board will usually want to let the guy have a chance."
Steel and Smith were unavailable for immediate comment, a Wachovia spokeswoman said.
Despite the worse-than-expected results, Wachovia shares rose 46 cents to $14.75 in after-hours trading. The shares had fallen $1.25, or 8 percent, to $14.29 during regular trading, leaving them down 63 percent for the year.
Mortgage Losses Drag
Steel was a leading figure in helping arrange a complex though ultimately unnecessary plan last year among large banks to back so-called structured investment vehicles.
He was also involved in the spring bailout of investment bank Bear Stearns by JPMorgan Chase.
In a statement, Paulson said Steel served President George W. Bush and the public "with ingenuity and dedication during extraordinary times in our financial markets. I know he will excel in his future endeavors."
At Wachovia, Thompson presided over a series of write-downs and legal mishaps, including a $24.2 billion purchase in October 2006 of California mortgage specialist Golden West Financial Corp just as the nation's housing market was cresting.
In a statement, Smith said Steel is the right person to provide "sound leadership" and to "successfully manage the company through the current environment as a strong and independent company."
Ben Jenkins, who had been interim chief operating officer, will remain president of retail and business banking.
Wachovia said the second quarter's results will include a $4.2 billion pre-tax increase to loan loss reserves, including $3.3 billion related to the "Pick-a-Pay" option adjustable-rate mortgages in which Golden West specialized. Last week, Wachovia said it discontinued that product.
The bank said charge-offs totaled about $1.3 billion in the quarter, including $500 million related to the Pick-a-Pay portfolio and $280 million for commercial real estate. It expects to report a Tier-1 capital ratio of about 8 percent, well above regulatory minimums.