Wachovia Slumps After WaMu's Seizure, Bailout Impasse

By Linda Shen and David Mildenberg

Sept. 26 (Bloomberg) -- Wachovia Corp. and National City Corp. slumped after negotiations on the government's financial bailout stalled and Washington Mutual Inc. was seized by regulators and sold to JPMorgan Chase & Co.

Wachovia dropped $3.70, or 27 percent, to $10 at 9:34 a.m. in New York Stock Exchange composite trading, leading bank stocks lower. Cleveland-based National City fell 20 percent to $4.01. Charlotte, North Carolina-based Wachovia and National City plunged more than 80 percent in the past year.

WaMu was seized by regulators yesterday in the biggest U.S. bank failure after customers of the Seattle-based lender withdrew $16.7 billion from accounts since Sept. 16. The savings and loan was ``unsound,'' the Office of Thrift Supervision said. The collapse came as lawmakers planned to meet again after talks on Treasury Secretary Henry Paulson's bailout reached an impasse.

Wachovia, like WaMu, has ``mortgage problems, especially those that flow from its acquisition a few years ago of Golden West,'' said Bert Ely, president of Ely & Co. in an interview with Bloomberg Television. While Wachovia may be a target for a buyout, ``it's not clear who wants to take them on at this time.''

Wachovia had $122 billion of option adjustable-rate mortgages as of June 30, plus $45 billion in more traditional mortgages. That total of $167 billion ranks second among U.S. lenders behind Bank of America Corp.'s $239 billion, followed by Citigroup Inc.'s $145 billion, according to an Oppenheimer & Co. report on Sept. 23.

Golden West

Wachovia became the largest option ARM seller through its $24 billion acquisition in 2006 of Golden West Financial Corp., an Oakland, California-based lender that popularized the product over the previous 30 years. Wachovia expects cumulative losses of about 11 percent to 12 percent on its option ARM loans.

Merrill Lynch & Co. analyst Edward Najarian expects the losses to be in the 15 percent to 17 percent range, according to a Sept. 9 report. Housing prices in California declined by a record 41 percent in August, the 11th straight monthly decline, the California Association of Realtors said yesterday. Almost half of Wachovia's option ARMs are in California.

``A bailout plan needs to be approved as credit markets have frozen, credit spreads have widened and it's getting more difficult for businesses and consumers to get access to credit,'' said BMO Capital Markets analyst Peter Winter in a note to investors today.

Fifth Third Bancorp, Ohio's second-largest bank after National City, fell 6.4 percent, and Columbus, Ohio-based Huntington Bancshares Inc. dropped 4.9 percent.

To contact the reporters on this story: Linda Shen in New York at lshen21@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net