Will Wachovia Go Out Like Lehman?

Wachovia CEO Bob Steel, who took the helm in July, knows he has his work cut out for him. This bank’s been hit just as hard as any other financial throughout the housing slump and credit crunch. But Steel sprung into action as soon as he started the job, and it appears that he has the company on track for a recovery.

Steel’s strategy involves taking responsibility for the state of Wachovia and understanding the issues the bank faces. The CEO said it’s imperative that his team not only knows the challenges they face but that they talk about them openly. He’s also focused on the balance sheet. Within two weeks of being on the job, Steel cut the dividend. The firm is also reducing expenses by $1.5 billion and cutting the entire balance sheet by $20 billion. Steel expects to generate as much as $6 billion in incremental capital in the next year.

Some analysts, though, namely Oppenheimer & Co.’s Meredith Whitney, say that Wachovia is a bit too optimistic about its situation, particularly its California mortgage exposure. They say the bank needs to mark down its estimates for that portfolio.

Steel knows there can be a lot of assumptions about Wachovia’s holdings in this area, but he said the company merely tried to provide accurate data as to what those holdings were – right down the ZIP code. Conclusions would be left up to analysts like Whitney.

What these analysts are missing, though, Steel said, is that Wachovia doesn’t own mortgage-backed securities – they own mortgages. And this gives the bank plenty of leeway in terms of working with homeowners to find solutions to problems preventing them from making their payments.

“We have lots of flexibility to figure out how to do this,” Steel said. “If we just owned securities we would have two choices: hold or sell.”

“We have lots of choices.”

Wachovia has also set up a special project similar to what Cramer’s been calling for with all struggling banks: dividing the good parts from the bad. The worst loans are separated from the rest of the balance sheet, and they’re approached as if Wachovia were a distressed-debt investor. That way the bank can focus on maximizing its rate of return.

“We think that will yield quite attractive returns over time by owning these assets,” Steel said.

Of Wachovia’s $500 billion in loans, only $10 billion are “problematic.”

“We have a lot of very good loans that are doing well,” Steel said, “and we’re going to focus like crazy” to deal with the bad loans that are dragging on the company.

Steel admitted that the Lehman Brothers bankruptcy has made his life difficult is some respects, but he does believe that the severity of the situation has left its mark on regulators, and the Federal Reserve, and that hopefully much-needed capital will be “a bit more available” going forward.

But Cramer wanted to know, was all this work just to make Wachovia more attractive to potential buyers?

“We have a great future as an independent company, but we’re a public company,” Steel said. “So we’re going to do what’s right for shareholders I can promise you that. But we’re also focused on the very exciting prospects when we get things right going forward.”

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com