By Jonathan Stempel
NEW YORK (Reuters) - Wachovia Corp reported a third-quarter loss of $23.9 billion on Wednesday, a record quarterly deficit for a banking company in the global credit crisis, underscoring the challenges Wells Fargo & Co faces when it acquires the big lender.
The loss reflected an $18.7 billion writedown of goodwill because asset values fell, and $6.63 billion set aside for credit losses. Wachovia has lost $33 billion in the last two quarters, roughly the gross domestic product of Guatemala.
"We have weakening in the economy, and loan losses continue to be problematic," said Gary Townsend, co-founder of Hill-Townsend Capital in Chevy Chase, Maryland. But he said "Wells wants and needs Wachovia" to expand and said the merger will "absolutely" go through under its original terms.
Earlier this month, Wells Fargo agreed to buy Charlotte, North Carolina-based Wachovia for $15.1 billion, without any government backing to cover loan losses it said could reach $74 billion. The value of the all-stock merger had fallen to $14 billion as of Tuesday. A fourth-quarter closing is expected.
The purchase would more than double San Francisco-based Wells Fargo's size. It would create the nation's fourth-largest lender, with $1.4 trillion of assets, and biggest retail banking network, with more than 6,600 branches.
John Stumpf, Wells Fargo's chief executive, called Wachovia's quarterly results "very much in line with our expectations." Wells Fargo said the results would not affect its plan to raise $20 billion.
Wachovia's loss was $11.18 per share, compared with a year-earlier profit of $1.62 billion, or 85 cents per share.
Excluding one-time items, the loss was $4.76 billion, or $2.23 per share, eight times the average analyst forecast for a loss of 27 cents, according to Reuters Estimates.
It nearly doubled to $26.1 billion its forecast for losses on a troubled $118.7 billion mortgage portfolio tied to its disastrous purchase in 2006 of California lender Golden West Financial Corp.
Wachovia's loss was roughly twice the $12 billion of red ink that Swiss bank UBS AG reported for the first quarter, one of the banking sector's biggest recent losses.
Shares of Wachovia closed down 38 cents, or 6.2 percent, to $5.71, while Wells Fargo dropped $1.34, or 4.1 percent, to $31.30. The KBW Bank Index, which includes both, fell 5.8 percent.
MARKET ENVIRONMENT CHANGES
Wachovia accepted the Wells Fargo merger just four days after agreeing to sell its retail and investment banking units to Citigroup Inc for $2.16 billion, an agreement that included government backing to limit loan losses.
The dealmaking came less than three weeks after Wachovia Chief Executive Robert Steel said his bank was healthy and planned to stay independent.
But credit worsened, and core deposits fell 8 percent in the third quarter, including a 24 percent plunge from commercial customers.
Wachovia said this reflected "significant market turmoil," which included concern about its health following the failure of Washington Mutual Inc, whose banking units are now owned by JPMorgan Chase & Co.
"The market environment changed more precipitously than anyone had expected," Steel said Wednesday in a statement. Wachovia said the commercial deposit outflows have reversed.
On Tuesday, the Federal Reserve Board said emergency conditions, including Wachovia's weakened financial state, warranted quick approval of the Wells Fargo transaction.
Citigroup is suing Wells Fargo for $60 billion for alleged interference with its agreement with Wachovia.
MORTGAGES WEAKEN
Much of Wachovia's troubles stem from the $118.7 billion portfolio of "Pick-a-Pay" option adjustable-rate mortgages it largely took when it paid $24.2 billion for Golden West.
Wachovia now expects losses on 22 percent of that 438,000-loan portfolio, up from the 12 percent it forecast in July. It expects most of the losses by the end of 2009, and no longer makes the loans. Wells Fargo has said losses on the portfolio could reach 26 percent.
Option ARMs let borrowers defer interest and principal payments. Many borrowers are under water because housing prices have tumbled, and 69 percent of the Pick-a-Pay portfolio is in hard-hit California and Florida.
In the Merced, California, area about 130 miles southeast of San Francisco, Pick-a-Pay borrowers owe an average 66 percent more on their loans than their homes are worth.
About two-thirds of Wachovia's goodwill writedown related to retail and small-business operations, including Pick-a-Pay loans. Most of the rest related to commercial banking.
Results included losses or charges of $2.5 billion tied to market disruptions, $682 million on principal investing, $515 million for job cuts, $497 million for a regulatory settlement over auction-rate securities, and other items.
In consumer and business banking, Wachovia's largest unit, profit fell 43 percent to $857 million, while wealth management had an $84 million profit. Corporate and investment banking lost $703 million, and capital management lost $499 million.
(Editing by Steve Orlofsky, John Wallace and Bernard Orr)
