Friday, October 24, 2008


"First" of the Day: Greatest bank loss ever

When it comes to economic "firsts," I can't keep up. But for today's entertainment we have this—

Wachovia posted a $23.7 billion quarterly loss yesterday, the largest ever for a bank, as its portfolio of loans deteriorated and deposits fled. —Zachary A. Goldfarb reporting in "Wachovia reports historic loss"

Deposits did indeed flee. Goldfarb notes that in September "customers pulled out 5 percent of their deposits, or $13.4 billion -- a massive amount for a bank."

But that doesn't give the true picture. This wasn't a run on the bank by little account holders standing in line in hopes of withdrawing their deposits, as occurred during the Great Depression or more recently during the collapse of British bank Northern Rock. It was the business account holders, which didn't attract the attention of the media. In fact, the media were unaware of it.

David Ellis writes

Fears about Wachovia's ultimate demise first took hold in mid-September following the collapse of Lehman Brothers and shortly after Lehman rival Merrill Lynch was forced into the arms of Bank of America.

Even as Wachovia's consumer customers remained relatively calm about the bank's fate in the days that followed, Wednesday's results revealed that commercial depositors feared that the bank could be next. In just one quarter, the amount of commercial core deposits plunged by a colossal 24% from the previous quarter to $83.4 billion.

According to David Mildenberg, the run on Wachovia was a "catalyst" for the Federal Deposit Insurance Corporation (FDIC) to raise the government guarantee on individual deposits from $100,000 to $250,000.1

To put Wachovia's loss into perspective, Goldfarb writes that—

On top of $10 billion in losses earlier this year, the quarter wipes out nearly all the profit Wachovia has earned since 2001, when it merged with First Union and became a much bigger, national bank.

And Jill Treanor and Chris Tryhorn add that—

The $24bn (£14.7bn) of losses amount to more than the total price being paid for the North Carolina lender by its rival Wells Fargo, which was last night playing down the impact of the figures on the combined business.

Which brings us to Wachovia's savior Wells Fargo, which bested Citigroup's government-supported effort to buy Wachovia. The deal is still in the making, but Wells Fargo's offer of $15 billion was in kind, which is to say that no money would change hands, but Wells Fargo would acquire Wachovia by exchanging some of its stock for Wachovia's.

Wachovia shareholders have seen the value of their shares fall from around $47 a year ago to $5.75 as I write . The only problem is that the value of Wells Fargo stock has declined since the offer. In addition, the company is being sued for fraud for investing the money of three foundations and an insurance fund in mortgage-backed securities and then altering their financial statements. This is not likely to inspire investor confidence.

Related posts
Shades of 1929 (9/15/07)
The Depression Chronicles – 1: Bankruptcies (4/19/08)



1Another "catalyst" was the run on the money-market funds and the unprecedented government guarantee of those deposits, but I'll save that story for another day. [back]

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