The True Cost Wachovia's Golden West Buy

by: Gary Townsend June 04, 2008 | about stocks: WB    

Gary Townsend

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Ken Thompson is gone, but could it really cost Wachovia (WB) $50 billion to fix Golden West, as Jim Cramer asserted last week?  This top-of-market acquisition ranks with the worst, but twice the price tag?  It’s worth running some numbers. Here’s a recap of the October 2006 transaction: 

  • The $24.3 billion deal generated $13.8 billion in intangibles and another half billion in restructuring charges.

  • It added $122 billion in mortgage loans, considered “pristine” credits at the time, but now performing poorly.

  • Deferred interest on its negative amortized mortgage loans came to $1.2 billion at the time of the deal, but was $3.5 billion as of March 31, 2008.

Wachovia expected the deal to accrete quickly to earnings, and even took its “Pick-a-Pay” mortgage product nationwide, building that portfolio by 3.11% in the past year to $121.2 billion at quarter end.  According to company reports, non-performing Pick-a-Pay loans increased 500% since the first quarter of 2007, to 3.82% of loans.  Net charge-offs increased to 0.79% of average Pick-a-Pay loans, from none in in the first quarter of 2007.  Wachovia now estimates a “cumulative life of portfolio” loss of between 7% and 8%.

Mortgage defaults, falling home prices, and recession make losses the present reality and accretion a distant possibility.  The rapid deferred interest build is likely associated with the portfolio’s most distressed homeowners.

Accordingly, if we assume that the intangible asset is worthless and add restructuring charges, a cumulative loss of $9.15 billion on the Pick-a-Pay portfolio, and a 50% loss on its deferred interest, we sum an additional loss of $25.2 billion.  While only half Cramer’s estimate, it still well explains the 45% decline in Wachovia’s market capitalization, from $92.6 million just before the deal announcement in May 2006, to $51.4 billion today--a key reason why Thompson had to go.

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This article has 2 comments:

  •  
    Jun 04 08:16 PM
    The Golden West deal will be a serious issue for the next 12 months and probably cost WB $15-20 billion. But the fact that they fired Ken and have NO SUCCESSION PLAN is a freaking disaster! The whole BOD should be replaced as they come up for election.
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  •  
    Jun 07 07:24 AM
    After the Golden West analysis, you then have to add back non-performing commercial real estate, especially to builders. If Michael Price is shorting at $21/share, this bank is withering until Jamie Dimon throws another life raft into the mortgage meltdown abyss. Who writes done another $10 billion first? WaMu or WB?
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